- FX: Will Jack Lew be Good or Bad for the Dollar?
- EUR: Draghi Comments Could Save or Sink the Euro
- GBP: No Action Expected from BoE
- AUD: Shrugs Off Weaker Retail, Waiting for Chinese Trade
- NZD: Trade Deficit Narrows on Stronger Exports and Imports
- CAD: Housing Starts Decline for Fourth Straight Month
- USD/JPY Resumes its Rise After Abe-Shirakawa Meeting
FX: Will Jack Lew be Good or Bad for Dollar?
With no U.S. data on the calendar today, the dollar traded higher against most of the major currencies. So far U.S. earnings have been slightly better than the market’s lowered expectations and as a result, equities edged higher. The U.S. is about to get a brand new Treasury Secretary. According to various media reports, President Obama could nominate Jack Lew as a replacement for Tim Geithner as early tomorrow. For the foreign exchange market, the choice Treasury Secretary is extremely important because contrary to what some people may believe, exchange rate policy is determined by the Treasury and not the central bank. The Treasury decides whether currency intervention is necessary and whether certain countries should be branded as currency manipulators. Of course, the Treasury will consult with the Federal Reserve on intervention, but the central bank simply acts as an agent that executes the Treasury’s decisions. For these reasons and many other including responsibility for Fiscal Policy, President Obama’s choice of Treasury Secretary will be extremely important for forex traders.
Jack Lew who is currently the White House Chief of Staff has long been the top contender to replace Geithner. He is known as a skilled negotiator who thoroughly understands fiscal policy having served as the Director of the Office of Management and Budget under Obama and Clinton. During the Clinton years, he played a central role in the negotiations that resulted in Clinton’s 1997 Balanced Budget act, which suggests that he has the power to make the difficult decisions needed to cut a bipartisan deal. In terms of exchange rate policy, there’s not much to worry about. With fiscal finances in such a mess, the last thing that Lew will risk is infuriating China by branding them a currency manipulator. The greenback is neither extremely over or undervalued, so there’s no need for the Treasury to even consider FX intervention.
Since budget negotiations have held the U.S. economy and the financial markets hostage, Jack Lew’s ability to smoothly guide Congress to increase the debt ceiling and reduce the deficit will play a big role in how the dollar trades. Lew will have to act quickly because the U.S. could be out of money as quickly as mid February. If the debt ceiling is increased easily or at least before the coffers are empty, currencies and equities should rally in relief, which could mean a bit of weakness for the U.S. dollar as investors move out of safe haven and into riskier assets. If the talks don’t go well and Lew can’t get a deal in place and the U.S. finds itself in another government shutdown or rapid fire negotiations at the 11th hour, investors may pile back into the safety of the greenback. We believe that Lew will be confirmed easily and having successfully crafted a deal to avoid a government shutdown in 2011, he has what it takes to spare the U.S. economy from a deeper fiscal mess. In other words, expect his appointment to be positive for risk appetite and the financial markets, which should mean strength for the dollar against the Yen but weakness against high beta currencies such as the EUR, GBP and AUD.
EUR: Draghi Comments Could Save or Sink the Euro
The euro traded lower against the U.S. dollar today ahead of the European Central Bank’s monetary policy announcement. The ECB is widely expected to leave monetary policy unchanged but as usual, the comments from ECB President Draghi at the post monetary policy meeting press conference could save or sink the euro. Since the last monetary policy meeting, there have more improvement than deterioration in the Eurozone economy. While manufacturing activity contracted at a slightly faster pace last month, service sector activity, business and investor confidence in Germany, the region’s largest economy improved dramatically in December. With Spanish and Italian bond yields continuing to fall and the U.S. reaching a Fiscal Cliff deal, some of the central bank’s primary concerns should have receded. There has been no major change in labor market, which helped support retail sales. Yet investors are still nervous because the last time the ECB met, Draghi’s comments sent the euro tumbling. At the time, interest rates were left unchanged at 0.75% but the euro sold off because the ECB downgraded their 2012 and 2013 growth and inflation forecasts and on top of that had a “wide discussion” about interest rates (including negative rates). They said the risks to their economic outlook were to the downside but with Spanish 10 year bond yields falling and the U.S. reaching a Fiscal Cliff deal since hen, we don’t expect Draghi’s comments on Thursday to be as damaging to the EUR/USD as last month, when the currency pair fell from a high of 1.3086 down to a low of 1.2950 following the ECB meeting.
GBP: No Action Expected from BoE
The British pound traded lower against the U.S. dollar following a smaller than expected improvement in the trade deficit. The U.K.’s trade gap narrowed to –GBP 9.1 billion in November from –GBP 9.48 billion. Economists were looking for a bigger rebound in trade and were disappointed when they saw the results. Nonetheless, exports to the EU rose 8.9% month over month, reflecting an improvement in economic activity in Europe. This improvement is not expected to change the Bank of England’s plans for monetary policy. The BoE is widely expected to keep both interest rates and the size of their asset purchase program unchanged. Since the last monetary policy meeting on December 6th, there has been slightly more deterioration than improvement in the U.K. economy. While retail sales in November stabilized, consumer confidence fell steeply in December as spending growth weakened. This suggests that weaker consumer spending could weigh on growth in the fourth quarter. Inflationary pressures also declined as the labor market and housing market held steady. Improvements in the manufacturing sector were offset by a deeper contraction in the service and construction sectors. Overall, market indicators such as the FTSE and U.K. bond yields increased but this may not be enough to make the central bank less pessimistic. The last time the BoE met, MPC members voted 8 to 1 to keep their asset purchase program unchanged. The lone dissenter was David Miles who has consistently voted for more Quantitative Easing. For the BoE, their challenge is to manage monetary policy during a period of stagnant growth and rising inflationary pressures. While inflation has eased over the past month, energy companies are expected to raise prices. In December, the central bank was less concerned about international conditions and more worried about the high level of the GBP/USD – we don’t expect these fears to change. However we’ll hear none of that tomorrow because the BoE does not provide any details until the minutes are released 2 weeks later when monetary policy is left unchanged. As a result, the BoE meeting should be a nonevent for the British pound.
AUD: Shrugs Off Weaker Retail, Waiting for Chinese Trade
The Canadian and Australian dollars ended the day virtually unchanged against the greenback despite softer economic data. In Canada, housing starts fell to 198K from 201.4K in the month of December. This was the fourth month in a row that starts declined, indicating that the housing market is not faring as well as some other parts of the economy. Nonetheless, the CAD is still holding strong given the rise in oil prices, acceleration in manufacturing activity and improvement in the labor market. The Australian dollar proved to be surprisingly resilient – shrugging off lower retail sales and a decline in job vacancies. Consumer spending dropped for the first time in 4 months on the back of weaker demand for household goods and clothing. For the RBA, this deterioration in economic data along with a wider traded deficit raises the odds of another rate cut in the first quarter. Building approvals are due for release this evening but the main focus will be on Chinese trade numbers. If China’s trade surplus increases, the AUD/USD could extend its gains, especially if it is on the back of higher exports and imports. Trade activity in New Zealand improved slightly in November with country’s deficit narrowing to -700M from an upwardly revised -666M as exports and imports increased strongly.
USD/JPY Resumes its Rise After Abe-Shirakawa Meeting
After a two-day decline, USD/JPY resumed its rise and has taken all of the Yen crosses higher with it. No major Japanese economic data was released overnight but Prime Minister Abe along with other members of his administration met with Bank of Japan Governor Shirakawa last night and while the head of central bank declined to comment on the specifics of the meeting, Abe was quick to say that he wants to strengthen the cooperation between the government and the BoJ and wants monetary policy aimed at 2% inflation goal. There was nothing new in his comments but they served as reminder that the BoJ will most likely shift to a higher inflation target at their next monetary policy meeting. According to economy Minister Amari, Shirakawa said “he’ll consider all opinions given at the meeting.” The only question is what type of steps they will take to achieve that goal. Will they opt for unlimited asset purchases or gradually increase their demand? According to the Nikkei, a widely read Japanese paper, the BoJ may not set a time frame for achieving the inflation target, giving themselves the full flexibility to gradually meet that goal if necessary. Even after Shirakawa’s term ends later this year, the Japanese government will most likely bring in someone who “acknowledges that bold monetary easing” is necessary according to Chief Cabinet Secretary Suga. In other words, expect monetary policy in Japan to become even stimulative in the coming months.