- USD/JPY: Looking for Help from Retail Sales & Fed Minutes
- EUR: IMF and Eurogroup Negotiations Hold Off Greek Aid
- GBP: Rise in CPI Means No Additional QE in Dec
- AUD: Businesses Unfazed by Recent Improvements
- CAD: Oil and Gold Prices Unchanged
- NZD: Retail Sales Plunge in Q3
- JPY: More Political and Economic Uncertainty in Japan
USD/JPY: Looking for Help from Retail Sales & Fed Minutes
The slide in U.S. equities this month weighed heavily on USD/JPY and other major currencies. A large part of the weakness has been due to concern about the impact of President Obama's policies on the wealth of American businesses and consumers. While the Fiscal Cliff poses a major risk to the future trajectory of the U.S. economy, we shouldn't forget that there have been improvements that could still make the dollar more attractive than other currencies. Case in point is the non-farm payrolls report. With the steep slide in stocks, it is hard to remember that job growth exceeded even some of the most optimistic expectations in the month of October. Consumer confidence rose across the board last month, which should have supported consumer spending. There's no question that the recent turn of events probably made Americans more nervous and less willing to spend but economists are looking for a very small increase in retail sales last month which means it won't take much for the data to beat. Aside from solid job growth and an increase in confidence, the International Council of Shopping Centers reported a 4.4% increase in sales compared to a year earlier. Spending was particularly strong at wholesale clubs such as BJ's and Costco where pre-Sandy buying drove up sales. If retail sales beat expectations, it could simultaneously lift USD/JPY and risk appetite. Yet don't expect spending to be strong enough to exceed September's levels because a similar survey from Johnson Redbook actually reported a decline in spending.
The minutes from the last Federal Reserve meeting is also scheduled for release. If you recall, last month's FOMC meeting was a complete bore - currencies barely moved as the Fed left monetary policy unchanged. Going into the meeting, there was hope that the central bank would provide a boost to the market by acknowledging the improvements in the economy. While the central bank said "household spending continued to advance," they also said fixed investment appears to have slowed, inflation has been subdued and the committee is concerned that without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. These cautionary comments confirmed that the Fed is still very worried about the outlook of the U.S. economy and rightfully refuse to be swayed by one month of mediocre improvements in U.S. data. Unless the minutes reveal a more heated discussion about the improvements in the U.S. economy, we don't expect the FOMC minutes to provide much help for USD/JPY. Federal Reserve Vice Chairman Janet Yellen's comment that Fed policy should be linked to economic goals such as inflation and unemployment suggests that she remains extremely dovish.
EUR: IMF and Eurogroup Negotiations Hold Off Greek Aid
The euro ended the day unchanged against the U.S. dollar as concerns about Greece continue to loom large. November 20th is the new drop-dead date for Greece and by consequence, the EUR/USD. Euro area finance ministers will be holding a special meeting that day to decide whether the next aid payment for Greece should be released. Greek officials are confident that money will be disbursed on November 20th or shortly thereafter but given the reluctance of the IMF and European officials, we fear that Greece may only receive enough aid to tie them over until they reach a further agreement with the Eurogroup and IMF. In other words, Greece will most likely get enough money to avoid a default this year but the discussions and risk of a default won't stop there. The problem is that the Troika is not only fighting with Greece but also with each other. The IMF wants an official write down of Greek debt but European officials oppose this vehemently. They also want to link debt sustainability with disbursement while the Europeans want to decouple these 2 issues. Early gains in the euro are beginning to fade after the German Finance Ministry denied a rumor created from an article in a German newspaper that claims Germany wants to bundle all 3 aid payments to Greece into one big payment of EUR 44 billion. As expected, euro area finance ministers failed to reach a deal this week and remove the risk of a Grexit. They agreed to give Greece 2 more years to meet their fiscal adjustment programs and postpone the primary decision on aid disbursement to November 20th. Between the market's ongoing concerns about Greece, weaker investor confidence (German ZEW survey) and higher Spanish 10 year bond yields, the euro has fallen to a fresh 2 month low against the U.S. dollar. The 100-day SMA and second standard deviation Bollinger Band at 1.2640 provides near term support for the currency pair.
GBP: Rise in CPI Means No Additional QE in Dec
While the British pound ended the day virtually unchanged against the U.S. dollar and euro, there's no ignoring the fact that U.K. inflationary pressures are on the rise. Consumer prices rose 0.5% last month, driving up the annualized pace of growth to 2.7% from 2.2%. This huge jump took annualized CPI growth to its highest level in 5 months, which in our opinion all but guarantees steady monetary policy for the Bank of England next month. The price for food, clothing and services increased significantly with a particularly large rise in university tuition fees. As part of their deficit reduction measures, lawmakers voted to allow universities to triple its fees to up to 9,000 pounds a year starting with this year's new batch of students. Input prices also increased on the producer level but output price growth slowed. The sharp rise in consumer prices will validate the concern of policymakers who have been worried that inflation is not falling fast enough. With CPI reversing trend, their calls to leave monetary policy steady will only grow louder. The Bank of England has one more meeting before the end of the year and we now see a 90% chance of no change to their asset purchase program. The central bank's Quarterly Inflation Report will be released on Wednesday and we expect to see renewed concerns about inflation. UK employment numbers are also on the calendar but no major improvements or deterioration is expected for the labor market.
AUD: Businesses Unfazed by Recent Improvements
The Australian, New Zealand and Canadian dollars ended the day slightly lower against the greenback. Despite a recent rate cut by the RBA, stronger domestic data and signs of improvement in China, businesses confidence in Australia declined in the month of October. Although manufacturing and service activity improved last month, the fact that both sectors are contracting and not growing has caused businesses to cut capital spending to its lowest levels since August 2009. The deterioration in business confidence is certainly worrisome because it can have a direct impact on hiring. Consumer confidence is due for release tonight and a similar decline could drive the AUD/USD below 1.04. However not everyone is as pessimistic, the head of the RBA's economic analysis group said last night that a pickup in housing activity and dwelling investment in the near term could help offset weaker mining growth in the coming years. New Zealand retail sales fell 0.4% in the third quarter, which is not surprising considering the sharp increase in unemployment. Although the New Zealand dollar has stabilized, it may be difficult for the currency to hold stronger under such a weak economic backdrop. No economic data is expected from Canada until Thursday but Canadian Finance Minister Flaherty spoke this afternoon and he expressed concerns about the negative impact of the U.S.' fiscal cliff on Canadian growth.
JPY: More Political and Economic Uncertainty in Japan
The desire for safety continued to drive investors into the Japanese Yen even as the outlook for Japan grows more uncertain. The big story today was the report that Prime Minister Noda plans to dissolve the lower house later this year and begin holding elections in late December, early January. Holding snap elections was part of the terms that Noda agreed to in order to get opposition support for the consumption tax. While dissolving the lower house proactively may help Noda avoid a no confidence vote on his unpopular Cabinet, the problem is that many members of his party fear that it may mean a complete defeat for the DPJ which could the pave the way for the LDP to regain power. However moving forward with elections may be one of the only ways Noda can get the opposition party to authorize Japan to sell more bonds to finance their growing deficit and prevent the country from emptying its coffers by the end of November. The political uncertainty comes at a terrible time for Japan's economy. According to a report from the Cabinet Office, consumers are saving and not spending as the cash balance of households rise to its highest level since 2005. Rating agency Fitch warned that there is little scope for near term optimism on the Japanese economy and Kyodo news reports that the government could downgrade its economic assessment next week. No major economic reports are scheduled for release from Japan this evening but continued weakness and uncertainty could eventually catch up to the currency.