- FX and Stocks – Waiting for New Catalyst
- EUR: Bouncing Off 1.30
- GBP: Prime Minister Downplays Significance of Downgrade
- CAD: IVEY PMI Rises for First Time in 5 Months
- AUD: Trade Balance on Tap
- NZD: Powers Higher Despite Lack of Data
- JPY: Rallies on Japanese Government’s Conciliatory Tone
FX and Stocks – Waiting for New Catalyst
The U.S. dollar traded lower against all of the major currencies with the exception of the comm dollars. U.S. stocks pulled back today but the losses were limited as investors try to figure out whether the next move should be risk on or risk off. Fourth quarter earnings begin with Alcoa tomorrow and given the lack of U.S. data this week, we believe that the dollar will take its cue from earnings and comments from the Fed officials. Traditionally, the EUR/USD and the S&P 500 have a solidly positive correlation but since the middle of December, this correlation has broken down which means either the S&P 500 needs to correct or the EUR/USD will rally and Q4 earnings could determine how this relationship resumes. If earnings are weak, we could see a further sell-off in EUR/USD. If they are strong, the currency pair could enjoy a broader recovery.
Aside from earnings, the main focus for the dollar and the foreign exchange market will the speeches from Federal Reserve Presidents. The big surprise last week was the Fed’s discussion about ending QE3 in 2013. While the upward revision to the unemployment rate eased some concerns, if job growth continues at a steady pace, the Federal Reserve could be compelled to end asset purchases this year. The confusion created by the FOMC minutes makes this week’s comments from Fed Presidents extremely important because investors want to know how serious the central bank is about phasing out QE. Fed President Lacker is speaking on Tuesday followed by George, Bullard and Kocherlakota on Wednesday and then Fed President Plosser on Friday. While all 5 members are expected to talk about the economic outlook, the 2 speeches to pay attention to are those of Kansas City Fed President George and St. Louis Fed President Bullard because they are set to become voting members of the FOMC this year. George is assumed to be a major hawk while Bullard is a wildcard. This year, the central bank loses Lacker, its most hawkish member and Pianalto a dove. If George and Bullard support phasing out asset purchases this year, the dollar could extend its rise.
The only pieces of U.S. data on the calendar tomorrow are the NFIB Small Business Optimism index and the IBD/TIPP Economic Optimism report.
EUR: Bouncing Off 1.30
The EUR/USD continued to find support above 1.30, rebounding for the second trading day in a row. From a fundamental and technical perspective, the EUR/USD appears poised for a stronger recovery. Fundamentally, a reduction in sovereign risk this year, should help restore confidence in Eurozone assets and technically, 1.30 is a significant level for the currency pair. The only piece of Eurozone data released this morning was producer prices and given the decline in inflationary pressures in Germany and France, it was not a surprise to see PPI fall 0.2%. The EUR/USD traded higher despite the lack of positive economic data in anticipation of the European Central Bank’s monetary policy meeting this week. With Spanish 10 year bond yields hovering around 5% and the U.S. government reaching a deal on the Fiscal Cliff, the ECB has a lot less to be worried about. Tomorrow should be a busy day for the euro with German trade balance, current account balance and factory orders scheduled for release along with Eurozone confidence and retail sales numbers. Marginal improvements are expected all around. Switzerland will also be releasing its labor market report and unfortunately the country’s unemployment rate is expected to increase from 3.1 to 3.3%.
GBP: Prime Minister Downplays Significance of Downgrade
The British Pound traded higher against the U.S. dollar but weakened against the euro. There were a few pieces of secondary U.K. economic reports released this morning – none of which will have a lasting impact on sterling. According to Halifax, house prices rose 1.3% in December, which was much stronger than anticipated. However, with little momentum generated from the government’s Funding for Lending Scheme, the increase was still smaller than the previous month. Employment confidence held steady last month according to Lloyds – this indicates that Briton’s assessment of employment conditions remain unchanged. However businesses appear to be growing more optimistic according to Deloitte’s survey of Finance Directors. Fears of a U.K. recession or a breakup of the euro have receded, paving the way for slightly stronger capital spending in 2013. Over the weekend, Prime Minister Cameron tried to downplay the importance of a sovereign downgrade – which we believe is the greatest risk for the GBP this year. He said while the U.K.’s rating is “hugely important,” “the real test is what are the interest rates the rest of the world are demanding in order to own your debt.” In other words, if yields do not move significantly higher on the back of a downgrade, then it is not as big of a deal. A good comparison would be the U.S. whose bond yield or borrowing costs declined after the downgrade.
CAD: IVEY PMI Rises for First Time in 5 Months
Despite the decline in U.S. equities, the Canadian, Australian and New Zealand dollars traded higher against the greenback. What was surprising about today’s movements in the commodity currencies was that the rally in the CAD was extremely shallow even though IVEY PMI surprised to the upside. Manufacturing conditions in Canada expanded once again after contracting in the month of November. The index rose for the first time in 5 months to 52.8 from 47.5. While economists were looking for an improvement, they had not expected a return to expansion. The CAD rallied on the back of the IVEY PMI report but the gains were limited. The same was true on Friday when the CAD ended the day unchanged despite solid employment numbers. From a fundamental perspective, USD/CAD should be trading lower but its limited losses could be tied to concerns about the U.S. economy, as the CAD tends to underperform when there is weakness in its largest trading partner. The New Zealand dollar on the other hand soared the most despite the lack of NZD data. The Australian dollar also ticked higher ahead of its PMI Construction report and trade balance. Economists are looking for Australia’s trade deficit to widen in November but an upward revision in the manufacturing PMI report suggests that the deterioration may not be large as they expect.
JPY: Rallies on Japanese Government’s Conciliatory Tone
The Japanese Yen traded lower against all of the major currency pairs with the exception of the New Zealand dollar after Finance Minister Aso said the the government “does not necessarily have to conclude a policy accord with BOJ” adding that, “As long as there’s talk (on monetary policy) at the council meetings, there’s no need to issue a policy accord (with the BOJ)”. According to our colleague Boris Schlossberg, “the more conciliatory tone suggested that the Abe government may ease its assault on BOJ policy, prompting traders to conclude that Japanese officials may be satisfied with yen levels for now. Adding to the idea that yen may have reached its targeting weakness was the head of Japanese business lobby Hiromasa Yonekura who stated that the current level of USD/JPY at 88.00 was acceptable.” Local newspapers are also reporting that the country’s supplementary budget could exceed Y12 trillion for FY2012 with Y10 trillion set aside for economic stimulus. The scale of this spending would reflect Abe’s commitment to turning the economy around but in order for that to happen, the government would need to sell Y5 trillion more bonds and reallocate funds used to pay down debt which ultimately means a higher debt burden for the nation.