Daily FX Market Roundup 01-22-13

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

Forex Traders Eye House Vote on Debt Limit
USD/CAD - Will the BoC Drop its Hawkish Bias?
AUD: CPI Could Miss RBA Forecasts
NZD: Oil and Gold Higher
GBP: BoE Minutes and Labor Market Data
EUR: No Lift from the ZEW
JPY: Did the BoJ Kill the USD/JPY Rally?

Forex Traders Eye House Vote on Debt Limit

The U.S. dollar traded lower against all of the major currencies today ahead of the House Republicans' vote on suspending the debt ceiling by extending the U.S. government's borrowing capacity until May 19th. In doing so, they would buy Congress nearly 4 additional months to work out a deal that will hopefully involve a combination of spending cuts and tax hikes. The bill is expected to include a term that says that if either chamber of Congress does not pass a budget by April 15th, "pay for members of the chamber that doesn't act will be withheld and placed in an escrow account." The stakes have been raised and hopefully that boosts the odds of the debt ceiling being increased by the spring. Since this bill is being proposed by House Republicans, the market would be shocked if it didn't pass. In fact, the weakness in the dollar and rally in stocks reflects an improvement in risk appetite that is rooted in the assumption that the debt ceiling won't be an issue for the next few months. As a result, the S&P 500 climbed to a 5 year high today. Only a few currencies have benefitted from the rally, which suggests that there could be a catch-up move in pairs such as the EUR/USD in the coming days.

There was very little in the way of U.S. data outside of existing home sales. Sales of previously owned homes fell 1% in the month of December as fewer homeowners listed their property towards the end of the year. While the number of homes sold dropped to 4.94 million, this was still the second highest number of homes sold since November 2009. The data shows that low interest rates continue to provide underlying support for the housing market especially considering that the median price of a home sold also increased 11.5% yoy last month. No major U.S. economic reports are due for release tomorrow. The only piece of data on the calendar is the house price index for the month of November, which is expected to improve slightly.

USD/CAD - Will the BoC Drop its Hawkish Bias?

The Canadian dollar ended the day lower against the greenback following mixed retail sales numbers. Consumer spending rose 0.2% in the month of November but the increase was led primarily by auto sales, which can be volatile. Excluding purchases of vehicles, spending declined by 0.3%. Consumption in the month of October was also revised lower which does not bode well for the Bank of Canada, who has a monetary policy decision tomorrow. Since the last BoC meeting, Canada enjoyed very strong job growth along with an expansion in manufacturing activity. Unfortunately this has yet to translate into stronger trade or retail sales and consumer prices declined in November. Based on these metrics, the Bank of Canada has little justification for talking about higher interest rates but we doubt they will shift away from their hawkish bias given the positive resolution to the U.S. Fiscal Cliff and the blowout job growth 4 out of the last 5 months because eventually this should translate into stronger economic activity for Canada. A reminder that the BoC is the only central bank talking about raising interest rates could put a bid underneath the Canadian dollar. Despite the lack of economic data, the Australian and New Zealand dollars rose strongly against the greenback thanks to the rally in U.S. equities. Australian CPI numbers are due for release this evening and inflationary pressures are expected to have eased in the fourth quarter, which means consumer prices will most likely miss the RBA's forecasts. An excessive slowdown in inflationary pressures would be negative for the Australian dollar.

GBP: BoE Minutes and Labor Market Data

The British pound rebounded against the U.S. dollar and euro despite weaker than expected economic data. Public sector finances continue to disappoint with the rise in tax receipts failing to offset increase in expenditures. Trouble in U.K. public finances is no major surprise but the sharp drop in the Confederation of British Industry's Total Order Trends index should have weighed on sterling. Orders plunged in the month of January, reflecting weakness in the export sector. Interestingly enough, this decline did not discourage businesses from growing less pessimistic. In fact, manufacturers are hopeful for some improvement in the coming months. Tomorrow will be a busy day for the British pound with the minutes from the most recent Bank of England meeting scheduled for release along with employment numbers. There's been quite a bit of deterioration in the U.K. economy since the last BoE meeting but with inflationary pressures to the upside, there could be very little support for easier monetary policy within the central bank. If the minutes are dovish, the GBP/USD could revisit its recent lows but part of that reaction would also hinge on softer employment numbers. No job losses are expected in December but according to the decline in the employment component of the PMI reports, the odds favor a rise in jobless claims.

EUR: No Lift from the ZEW

The euro received very little support from the sharp improvement in German investor confidence. The outlook component of the ZEW survey jumped from 6.9 to 31.5 while the current situation component rose from 5.7 to 7.1 for the month of January. Investors also grew significantly more optimistic about the outlook for the Eurozone with the EZ ZEW index rising to 31.2 from 7.6. As reported by our colleague Boris Schlossberg, "this was the second month in a row that German sentiment improved considerably suggesting that growth in Europe's biggest economy may be reviving. However, the ZEW survey which is a poll mainly of investment professionals tends to be skewed by financial market performance and the upcoming IFO report which deals with the business sector should be a more accurate gage of economic activity." He could not be more right. The German ZEW survey is a far less accurate measure of the country and region's economic performance than the IFO report and the PMI numbers scheduled for release this week and perhaps this is the reason why the EUR/USD gave up its post ZEW gains during the U.S. session. ECB President Draghi spoke today and the only meaningful comment that he made was on the lack of inflation fears.

JPY: Did the BoJ Kill the USD/JPY Rally?

The Bank of Japan's monetary policy decision proved to be a big disappointment with the Japanese Yen trading higher against all of the major currencies today. On the surface, the Bank of Japan made some dramatic changes to monetary policy but the details of their decision was far less aggressive. The Bank of Japan shifted to a 2% inflation target but the decision was not unanimous. Takehiro Sato and Takahide Kiuchi voted against the new target, saying that it was too high and that a growth strategy was needed first. Based on the central bank's CPI revisions, the members who voted for the target seemed to have very little confidence in achieving their goal. The BoJ upgraded their 2014 core CPI forecast by a mere 0.1% to 0.9% which means that they believe their "open-ended APP program" will only boost inflation by 0.1% next year. So realistically, 2% inflation probably won't be achieved until 2015 or 2016 at the earliest. In fact instead of providing a specific year, the BoJ even said the deadline for achieving their target is "the earliest possible time," which confirms our belief that they have no confidence in boosting inflation to 2%.Yet the main reason why the BoJ decision was such a huge let down was because open-ended asset purchases won't start until 2014, leading investors to wonder what type of support they will provide to Japan's economy between now and then. Japan won't be getting any additional stimulus this year as the central bank keeps current asset purchases intact for 2013 and that's bad news for Japan and USD/JPY.After enjoying a very nice rally over the past 2 months, the lack of an immediate shift to an open ended APP program triggered profit taking in USD/JPY. Expectations were extremely high going into the BoJ meeting and the central bank needed to deliver more than the market had discounted. Unfortunately when sentiment is so skewed, the potential of disappointment is also very high and by under delivering, the BoJ killed the rally in USD/JPY - for now.