Daily FX Market Roundup 02-13-13

Will G20 Come Down Hard on Japan?
EUR: Eurozone Technical Recession to Deepen
USD: Retail Sales and Bullard Comments Reinforce Easy Monetary Policy
GBP: Crushed by Grim Outlook from BoE King
AUD: Biggest Jump in Confidence Since September 2011
NZD: English Says Intervention is Futile
CAD: Oil Edges Closer to $100

Will G20 Come Down Hard on Japan?

The biggest event risk this week is the G20 meeting, which begins tomorrow and ends on Friday. USD/JPY is trading cautiously ahead of the meeting after being jostled around by G7 comments. Since the G20 added currency language into their communiqué in October 2010, this meeting has become the central focus for currency traders. In the past, currency policy would be determined at the G7 but since then, the broader meeting is the one that matters. The Japanese Yen will front and center at tomorrow’s meeting and based on conflicting comments from policymakers, there is very little consensus on how hard the G20 should come down on Japan.

We know that at least 9 of the G20 nations have no problems with Yen weakness and they are some of the heaviest hitters. This includes countries that have recently intervened in their currencies such as Brazil, Argentina and China. Others such as the U.S., Japan, U.K. and possibly Australia favor using monetary policy measures to weaken their currency while Germany and Canada have no problems with Yen weakness. Earlier today, Canada’s Finance Minister said the G7 statement was a consensus statement that was not meant to single out Japan and we think the G20 shares this view. While there’s no question that the volatility in the Yen has been higher than other currencies and it has weakened more substantially, Japan is not the only country guilty of taking steps to debase its currency.

At the end of the day, we don’t expect any substantial changes to the exchange rate language in the G20 statement. In fact it will probably read very much like the G7 statement on currencies that reaffirmed their prior stance and added a new line reaffirming that “fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates.” If that is all the G20 says, USD/JPY could renew its rally but we will have to wait till Friday to know definitively. In the meantime, Japanese fourth quarter GDP numbers are scheduled for release this evening and stronger growth is expected. The Bank of Japan will also make a monetary policy announcement but no major changes are expected since the BoJ just announced open ended asset purchases last month.

EUR: Eurozone Technical Recession to Deepen

The euro ended the day unchanged against the U.S. dollar but not before another round of widespread intraday volatility. Eurozone economic data was better than expected with industrial production rising 0.7% against expectations for only a 0.2% gain. However some of the positive implications of the increase were offset by a 0.5 percentage point downward revision to the prior month’s report. The details show countries such as Germany, Ireland and Luxembourg leading growth as industrial production in Spain and France stagnated. Italy and Greece experienced a small rebound but Portugal continued to see cuts in industrial production. In the latest round of euro currency talk, the German tabloid newspaper Bild reports that the ECB is worried about euro strength hurting the recovery. While it is hard to believe that the euro would react to unsubstantiated rumors especially when the Bild quoted no one, it did because investors were desperate for a catalyst. According to ECB Chief Economist Praet, OMT helped to reduce the strains in the financial markets but investors cannot become reliant on the central bank because non-standard measures can only be temporary. Meanwhile EUR/CHF received a lift from softer PPI numbers and the Swiss Finance Ministry’s decision to impose an additional 1% capital requirement on banks against their domestic mortgage lending. This move was aimed at reducing the risk of the bank’s lending portfolios and is negative for the Swiss Franc because it drains liquidity from the system. Eurozone GDP numbers are due for release tomorrow along with the ECB’s monthly report. GDP growth is expected to decline for the third consecutive quarter, leaving the Eurozone in a deeper technical recession.

USD: Retail Sales and Bullard Comments Reinforce Easy Monetary Policy

It was another mixed day for the U.S. dollar, which traded higher against the euro, British pound and Swiss Franc but lower against the Australian and New Zealand dollars. USD/JPY and USD/CAD held steady. The focus on the G20 and the so-called “currency wars” overshadowed today’s U.S. economic reports. Retail sales growth slowed to 0.1% in the month of January, down from 0.5% in December. While this increase was in line with expectations, excluding sales of autos and gas, consumer spending rose a mere 0.2% last month, compared to a forecast for 0.4% growth and a prior reading of 0.7%. The data shows that Americans have cut back spending after the holidays due in part to the impact of a 2% increase in payroll taxes. This is a tough start to the year for U.S. retailers but hopefully the recent performance of equities will support spending in the months forward. Import price growth also fell short of expectations, rising 0.6% compared to a 0.8% forecast. Prices were also revised down from -0.1% to -0.5% in December. Today’s soft economic reports are exactly the reasons why the Federal Reserve needs to keep monetary policy easy for the foreseeable. According to FOMC voter and St. Louis Fed President Bullard, economic growth will probably accelerate this year thanks to a stronger and more stable euro-area economy and a welcome reduction in global uncertainty. There are signs of “more robust” activity in the housing market and the house price decline risk has been “taken off the table.” As one of the less dovish members of the FOMC, these optimistic comments are consistent with Bullard’s usual views but what was interesting were his comments on inflation. Bullard also said inflation is running low, giving the Fed room to act. Meanwhile, it is worth noting that at his confirmation hearing, Jack Lew, President Obama’s nominee for Treasury Secretary said he will maintain a strong dollar policy if confirmed. While the U.S. Treasury has done nothing but pay lip service to this policy, it is an important reminder that the Treasury and not the Federal Reserve sets currency policy.

GBP: Crushed by Grim Outlook from BoE King

The British pound dropped to a 6 month against the U.S. dollar following dovish comments from Bank of England Governor Mervyn King who spoke after the Quarterly Inflation Report was released. While the central bank raised its CPI forecast, King painted a dour picture of the U.K. economy that was consistent with a continuation of accommodative monetary policy. According to our colleague Boris Schlossberg, who wrote about this extensively, “ Governor Mervyn King suggested that price pressures will likely remain sticky for longer than anticipated while growth will be anemic for the foreseeable future. In his annual address on inflation Mr. King painted a rather dour picture of the conditions in the UK economy noting that CPI will remain above the 2% target rate for quite some time and may even tick up to 3% before receding. GDP meanwhile was projected to reach a rather paltry 1.9% growth in 2 years time and the MPC will maintain its accommodative stance despite the high inflation numbers. Although Mr. King’s remarks echoed much of the same sentiments of the recent MPC statement, the currency markets nevertheless reacted badly to his comments, as they offered no hope of any significant improvement in the UK economy in the near future. Yet even Mr. King admitted that much of the decline in the UK GDP numbers in Q4 was due to contraction in construction rather than a broad weakening in services and manufacturing sectors and he expects that dynamic to improve.” The downtrend in the GBP/USD remains intact with support at 1.55 and below that at the May low of 1.5268.

AUD: Biggest Jump in Confidence Since September 2011

The Australian and New Zealand dollars traded higher against the greenback following better than expected Australian consumer confidence numbers and comments from New Zealand’s Finance Minister. Australia’s Westpac Consumer Confidence index jumped 7.7%, the largest increase since September 2011. While there are certainly areas of concern in the Australian economy, the rise in house prices and rally in stocks helped to bolster consumer sentiment and hopefully this will support overall economic activity. The New Zealand dollar on the other hand benefitted from Finance Minister English’s comment that the current level of the New Zealand dollar reflects the strength of the economy. New Zealand’s government has no interest in intervening in their currency after having done so unsuccessfully in 2007. English admits that it would take a couple hundred billion dollars to effectively influence the exchange rate to be taken seriously and without these resources readily at their disposal, “we’d be out in the war zone with a peashooter.” The Canadian dollar ended the day unchanged against the greenback as oil prices climb towards $100 a barrel. New Zealand consumer confidence numbers are due for release this evening along with Australian inflation expectations. We are looking for slightly stronger numbers on both fronts.