- USD: Why an 11th Hour Fiscal Cliff Deal is Possible
- Behind the EUR and DAX Rally
- GBP: Consumer Confidence Rises to 18 Month High
- NZD: Biggest Loser, Possible RBNZ Pre-Positioning
- CAD: Q3 GDP Growth Slows Significantly
- AUD: RBA Expected to Cut Rates Next Week
- JPY: No Help from Stronger Data
USD: Why an 11th Hour Fiscal Cliff Deal is Possible
Both President Obama and House Speaker Boehner took to the podium today to talk about the Fiscal Cliff but unfortunately neither one of these gentlemen proposed anything new and instead this time, Boehner blamed Democrats for wanting to send thousands of small businesses off the cliff. Yesterday Senate Majority Leader Reid said it will be the fault of GOP leaders if a deal isn't reached. Congress hasn't gotten any closer to reaching a deal and the clock is ticking quickly. There may be 31 days left before the end of the year but counting the holidays, Congress has less than 15 days to come up with a deal and "right now we are almost nowhere" according Boehner. We continue to believe that Congress will announce a partial deal at the eleventh hour that involves closing loopholes, limiting deductions and extending Bush era tax cuts for low to middle income households. Congress is not unfamiliar with 11th hour deals. Last year, House Republicans held out until Friday December 23, 2 days before Christmas to approve the payroll tax cut extension. Two years before that, the Senate worked until the early hours of Christmas Eve to pass an initial version of the healthcare reform. Given the significance of the Fiscal Cliff, severity of the consequences and the fact that up until now, Republicans and Democrats remain miles apart, an 11th hour announcement of a partial deal days and possibly even hours before Christmas is still a likely scenario.
Meanwhile weaker U.S. economic data failed to have much impact on the dollar. Personal income and personal spending fell short of expectations with incomes stagnating and spending falling by 0.2%. While it may be somewhat healthy to see spending decline when incomes fall, today's data shows that consumers are getting tapped out. Record breaking Black Friday and Cyber Monday suggests that Americans continue to spend beyond their means. As a result, the momentum on the 2 biggest shopping days of the year may have trouble being sustained throughout the holiday season. The only way for retailers to keep the momentum going is to keep discounts coming. Inflationary pressures also declined according to the PCE deflator and the personal savings rate increased from 3.3% to 3.4%. Non-Farm Payrolls and the ISM numbers will be released next week. U.S. companies are expected to add fewer than 100k jobs due to the impact of Hurricane Sandy and concerns about the Fiscal Cliff. Many companies are putting off their hiring plans until they get a better sense of whether the U.S. economy will fall back into recession in 2013.
Behind the EUR and DAX Rally
While the euro rose to a 1 month high against the U.S. dollar today, the rally has been far from convincing. The 1.30 level continues to be a point of contention for EUR/USD, which tested but failed to break above it a few times this week. Eurozone economic data was very disappointing with German retail sales plunging 2.8% and Eurozone unemployment rising to a record high of 11.7% in the month of October. While this week's German unemployment numbers surprised to the upside, job creation is grinding to a halt and job losses in other parts of the region accelerated. Yet EUR/USD remains strong while the German DAX hovers near 16-month highs leading investors to wonder why European assets are doing well. First and foremost, the strength has everything to do with the slide in European bond yields. With Spanish 10 year yields hovering closer to 5% than 6%, European sovereign debt risks have receded. Today, Germany's Bundestag approved the third Greek bailout package by a large majority, taking another risk off the table. While some analysts argue that the sharp decline in retail sales today points to the need for a fourth bailout next year, for the time being, the German MP approval is a win for Europe. Finally the rally in the EUR/USD and the German DAX has also been attributed to the market's optimism that a deal will be made to avoid the Fiscal Cliff but so far we have not seen any real signs of progress. The ECB has a monetary policy meeting this week and they have made it abundantly clear that they are satisfied with the market's reaction to OMT and the current level of monetary policy. The ECB will continue to maintain ultra easy monetary policy and committed to providing unlimited liquidity.
GBP: Consumer Confidence Rises to 18 Month High
A sharp improvement in U.K. consumer confidence failed to lend support to the British pound. According to GfK, consumer confidence rose to its highest level in 18 months and this improvement in sentiment is consistent with the increase in retail sales according to a survey conducted by the Confederation of British Industry. Perhaps the U.K. economy is not doing nearly as bad as economists and the Bank of England fear. Earlier this month, BoE Governor Mervyn King admitted that their previous forecasts were too optimistic which may be true but at bare minimum, it appears that the U.K. could enjoy another quarter of positive GDP growth. Stronger consumer confidence bodes well for this holiday shopping season. The Bank of England's monetary policy announcement next week should be a nonevent for the British pound. Instead, the PMI reports will be far more important. Economists are looking for stronger manufacturing and service sector activity but weaker activity in the construction sector. Good data could promote further gains in the British pound.
NZD: Biggest Loser, Possible RBNZ Pre-Positioning
Of all the commodity currencies, the New Zealand dollar was hit the hardest. Some may attribute the decline to the 1.5% drop in building permits in the month of October but low interest rates have kept approvals near a 4-year high. Instead the deeper sell-off in NZD over the AUD and CAD may be attributed to expectations for dovish comments from the Reserve Bank of New Zealand next week. This will be only the second monetary policy meeting led by Graeme Wheeler who recently said the strong NZD has hurt exporters. Wheeler is not extremely worried about New Zealand's economy but the lack of major improvement in the trade balance and softer credit spending growth during the month of October could lead to some caution from the central bank. Australia and Canada also have monetary policy announcements along with a number of important economic reports on the calendar and the RBA is expected to cut interest rates for the fourth time year. While RBA Governor Stevens believes that steady monetary policy is prudent "for the moment," the minutes from the last monetary policy meeting showed a greater willingness to ease as "members considered that further easing may be appropriate in the period ahead." The Bank of Canada is not expected to alter interest rates but the could shift to a less hawkish monetary policy stance with growth slowing significantly in the third quarter. Canada's economy stagnated in the month September and grew a mere 0.6% in Q3, down from 1.7% growth in Q2.
JPY: No Help from Stronger Data
The Japanese Yen traded lower against all major currencies despite better than expected economic data. Despite grim forecasts of recessionary conditions in Japan, overall household spending declined less than expected, industrial production rose by the strongest amount in 10 months and housing starts soared more than 25%, the largest year over year change in more than 4 years. The increase in factory output was led by production of electronic parts for the iPhone. Japan is a leading producer of electronic components for the global market and the iPhone in particular. However not all news was good news. Consumer price growth remains weak, manufacturing activity contracted at a slightly faster pace according to the PMI report and the job to applicant ratio declined. LDP leader Shinzo Abe also toned down his stance by saying that "I won't comment on the [monetary policy] methods if I become prime minister." The upside surprises in data and more moderate comments from Abe should have driven the Yen higher but instead USD/JPY soared. So what drove USD/JPY higher? Investors could finally be recognizing the decline in 10-year JGB yields, which dropped to a 9 month low last night. Some traders may have also taken advantage of the recent pullback in USD/JPY to reset Yen shorts ahead of the election battle in December. There are not many Japanese economic reports scheduled for release next week so instead, the Yen will most likely trade on U.S. and Chinese data as well as Fiscal Cliff talks.