• FX: Caught in the Middle of Washington’s War of Words
  • EUR: Struggling to Break 1.30
  • GBP: Signs of Recovery in Spending
  • AUD: Hit by Pullback in Business Investment
  • CAD: Wider Current Account Deficit, GDP Next
  • NZD: Oil Up 2%, Gold Recovers
  • JPY: Ignores 9-Year Low in JGB Yields

 

FX: Caught in the Middle of Washington’s War of Words

Stealing a comment from my colleague Boris Schlossberg, this “Kabuki dance” in Washington is driving us nuts and reminds us of the days when EUR/USD seesawed on sovereign debt headlines. For the U.S., conflicting messages from lawmakers have left investors completely confused. Are we getting closer to a deal to avert the Fiscal Cliff or not? According to House Speaker Boehner, there is “no substantive progress in fiscal cliff talks” but according to New York Senator Charles Schumer, “progress is happening behind the scenes.” House Minority Leader Nancy Pelosi believes that Boehner’s comments is a part of the Republican strategy while Senate Majority Leader Harry Reid said it will be the fault of GOP leaders if a deal isn’t reached. Regardless of what is true and what is not, it is very clear that U.S. lawmakers are spending more time pointing fingers than working on a solution and this is bad news for the market and risk. While currencies have been able to rally today, they are well off their earlier highs with further gains unlikely as traders find themselves caught in the middle of Washington’s war of words.

Yet there is still a general sense of optimism in the forex market with some of the major currencies ending the day in positive territory. The mild disappointments in U.S. data failed to have a lasting impact on the dollar. Third quarter GDP growth was revised up to 2.7% from 2%. While the upward revision is good news, it missed expectations and more importantly personal consumption was much weaker than initially reported. Stronger growth came primarily from gross private investment with a small contribution from exports. The fact that jobless claims dropped below 400K is good news but at 393K, it did not fall as much as economists had anticipated and last week’s numbers were revised up to 416K from 410K. Pending home sales rose 5.2% in October, far surpassing the market’s 1% forecast. However even with the jump in sales, the stronger GDP with weaker consumer spending and a small improvement in jobless claims will not be enough to inspire less dovish monetary policy from the Federal Reserve. Personal income and spending numbers will be released on Friday along with the Chicago PMI report.

 

EUR: Struggling to Break 1.30

The 1.30 level is proving to be a huge area of resistance for EUR/USD, which tested but failed to break above this key level 4 out of the last 5 trading days. Better than expected Eurozone data and lower European bond yields were overshadowed by concerns about the U.S. Fiscal Cliff. In Germany, unemployment rolls increased by 5k compared to a forecast of 16k, leaving the unemployment rate unchanged at 6.9%. While this was the 8th consecutive month of rising unemployment, the smaller increase suggests the German economy is not slowing as quickly as feared. Eurozone services, industrial and economic confidence also improved last month while Italian business confidence ticked higher as the country auctioned off 5 and 10 year bonds at the lowest yield in 2 years. In Spain, 10-year bond yields fell to a 6 month low of 5.25%. Stronger data and lower borrowing costs are positive fundamental developments that reduces the pressure on growth and the risk of Europe’s sovereign debt crisis exacerbating, but the risk of the U.S. falling off the Fiscal Cliff has limited the euro’s reaction. Yet as long as Spanish bond yields remain below 6%, the panic in Europe will remain at a minimum. German and French consumer spending numbers will be released Friday along with Eurozone unemployment and CPI estimate. Meanwhile the Swiss Franc rallied against the U.S. dollar and yen following stronger GDP numbers. Switzerland’s economy grew by 0.6% in the third quarter thanks to a sharp increase in exports, vindicating the central bank’s currency intervention policy. On an annualized basis, Swiss growth rose to 1.4%, the highest level since the third quarter of 2011.

 

GBP: Signs of Recovery in Spending

The British pound traded higher against the U.S. dollar in the face of mixed economic data. According to the Nationwide Building Society, house prices stagnated in the month of November. Consumer spending on the other hand is on the rise with the Confederation of British Industry’s sales index hitting its highest level in 5 months. This strength is at odds with other reports that we have seen from the U.K. that paint a picture of continued weakness in the U.K. economy. The increase may have more to do with recovery from weakness seen during the same period last year as volumes have declined than a real improvement in spending. However retailers reported optimism for December, which suggests a stronger holiday shopping season. The CBI index tends to have a positive correlation with the official retail sales index and therefore points to a recovery in spending in month of November. Consumer confidence is due for release this evening.

 

AUD: Hit by Pullback in Business Investment

The Australian, New Zealand and Canadian dollars ended the day lower against the greenback with the AUD/USD leading the decline. The sell-off in the Australian dollar was triggered by the decline in business investment. Private capital expenditure dropped to 2.8% in the third quarter from 3.4% in Q2. While the slowdown was not as bad as economists had anticipated, weakness in manufacturing and the decline in forward looking investment intentions is worrisome. For some investors, the investment pullback is significant enough to spark talk of another rate cut by the Reserve Bank of Australia. This speculation may be a tad premature particularly since investment in mining increased but it is nonetheless enough to keep AUD/USD trapped within its month long range. An increase in Canada’s current account deficit also weighed on the CAD. While the deficit did not widen as much as economists had anticipated, the fact that more money flowed out of Canada in the third quarter is bearish for the currency. Inflationary pressures remained weak in the month of October, supporting the case for a shift to neutral by the central bank. GDP numbers are due for release on Friday. Growth is expected to have slowed significantly in the third quarter but increase in September. Meanwhile stronger New Zealand business confidence failed to lift the NZD. According to ANZ bank business confidence rose to its highest level since April and the outlook for business activity also increased significantly in the month of November.

 

JPY: Ignores 9-Year Low in JGB Yields

It was a mixed day for the Japanese Yen, which traded higher against some but not all of the major currencies. The Yen rose against the U.S., Canadian, Australian and New Zealand dollars but lost value against the euro and Swiss Franc. Tonight will be very busy night in Japan with a great deal of economic data scheduled for release. This includes manufacturing PMI, the jobless rate, overall household spending, inflation, industrial production and housing market numbers. Last night we learned that retail sales rebounded in the month of October but not by as much as economists had anticipated. Sales rose 0.7% after falling 3.5% the previous month. Large retailers reported a decline of 3.2% on the year, reflecting ongoing weakness in demand. LDP Leader Shinzo Abe also repeated his opinion that the Bank of Japan should aim for 2% inflation. Considering that he had been talking about 2-3% inflation with emphasis on end of that band, the focus on 2% this time could be interpreted as a slightly more lenient stance. Japanese bond yields continue to fall with 10 year JGB yields falling a fresh 9 year low of 0.705% last night, a fresh 9 year low – the Japanese Yen completely ignored the decline.