- Don't be Misled by the Price Action in FX
- EUR: Concerns About Europe Return
- GBP: BoE Considered Rate Cut
- CAD: Little Chance Carney Will Follow Through
- AUD: Leading Indicators Rise
- NZD: Commodity Currencies Follow Risk Higher
- JPY: BoJ Minutes Reflect Ongoing Concerns
Don't be Misled by the Price Action in FX
The concurrent rally in the U.S dollar and U.S. equities imply good news relating to the U.S. economy but unfortunately the price action is misleading because this morning's U.S. housing market numbers were mixed and according to the Federal Reserve's Beige Book report there are more signs of slower economic activity in the 12 Fed districts. For the Federal Reserve who uses the Beige Book to decide if monetary policy changes are needed, there was nothing surprising in today's report.
While growth in some parts of the nation is slowing, other parts of the country are still growing at a moderate to modest pace. With this in mind however, 3 of the Fed districts reported slower growth compared to only 1 in the previous report. This means that the U.S. economy worsened in June and if the Fed wants to this trend to change, they will need to stimulate the economy further. Yet the Fed Chairman is very hesitant about resorting to a third round of stimulus. In Day 2 of his semi-annual testimony on Capitol Hill, Bernanke admitted that there is a theoretical limit to QE as the Fed can only buy Treasuries and agencies. The problem for the Fed is that they did not expect such a dramatic and sustained slowdown in job growth and since this wasn't anticipated, they are not sure how enduring the slowdown will be. Incoming economic data has been mixed, providing the central bank will very little direction.
According to the Beige Book report, the areas surrounding New York, Philadelphia and Ohio saw economic growth slow. This represents deterioration from the previous month when only Philadelphia reported weaker economic activity. Manufacturing and retail demand also softened while job growth improved at a tepid pace in most districts. Businesses remain cautiously optimistic but there were signs of improvements in loan demand and housing market reports were "largely positive." This morning's U.S. economic releases showed housing starts rising 6.9% in June and permits dropping 3.7%. The trend in both starts and permits has been rather volatile, which isn't particularly surprising considering that a housing market recovery always lags the broader economic recovery. The Philadelphia Fed Survey, Existing Home Sales and Leading Indicator reports are scheduled for release on Thursday along with the weekly jobless claims report.
EUR: Concerns About Europe Return
The euro ended the North American trading session unchanged against the U.S. dollar but its earlier weakness and rise in Spanish 10 year bond yields tell us that concerns about Europe have returned. In our end of day note yesterday, we warned that it is a mistake to assume that the focus on QE from the Fed means that Europe's sovereign debt crisis has gone away. This morning's weakness in the EUR/USD was tied to fresh concerns about stability in the region. With the memorandum of understanding for Spain's bank bailout plan scheduled to be signed on Friday, terms for Spanish aid are being hashed out right now. A spokesman for the German Finance Minister said the Finns needs to make concessions if they want a special guarantee for their part of Spanish aid. Ten year Spanish bond yields rose 13bp this morning to 6.85%. Comments from European Central Bank Executive Board member Joerg Asmussen about Eurozone stability certainly hasn't helped the euro as well as talk of a possible Austrian sovereign downgrade. Europe's debt crisis is back in the headlines and with it, the weakness in the euro. No major economic reports are expected from the Eurozone on Thursday but Switzerland will release its trade numbers, which should tell us whether the intervention efforts of the Swiss National Bank have helped to improve trade activity. With the euro extending its losses against many major currencies, the SNB has undoubtedly stepped up intervention efforts to keep EUR/CHF above 1.20. If the June trade numbers show continued weakness in exports, intervention will need to continue.
GBP: BoE Considered Rate Cut
Like the euro, the British pound ended the day unchanged against the U.S. dollar and slightly higher against the single currency. The recovery in sterling masked the market's initial reaction to the Bank of England minutes and U.K. employment numbers. The BoE minutes revealed a 7-2 vote in favor of the GBP50 billion expansion in asset purchases earlier this month. While the decision was not unanimous, the minutes were fairly dovish because policymakers considered the possibility of cutting interest rates. With rates already at a record low of 0.5 percent, the discussion of this and other options for stimulating the economy shows the level of desperation in the Bank of England. According to our colleague Boris Schlossberg " Chief Economist Spencer Dale and Ben Broadbent, dissented on the issue of 50 Billion GBP of additional QE voting for unchanged policy because of concerns about the inflationary impact of easy monetary policy. "The level of jobless claims held steady in June after a small downward revision to the prior month's report. The unemployment rate on the other hand dropped to a 9 month low but this improvement may have helped the British pound recover. U.K. retail sales are scheduled for release on Thursday. No major changes are expected with employment holding steady last month and the British Retail Consortium reporting only a small increase in sales.
CAD: Little Chance Carney Will Follow Through
The Australian, Canadian and New Zealand dollars strengthened against the greenback. The loonie strengthened after the Bank of Canada reaffirmed that a withdrawal of stimulus could be necessary. In their monetary policy report, they talked about the optimism of consumers and business investments to 2014 but expressed concerns about weaker global growth prospects. The Central Bank hinted that in the next meeting rates will increase which is the third time in a row that BOC Governor Mark Carney hinted of tightening rates. Although external growth is restraining Canada's economy, internal factors are forecasted to grow at a moderate pace. With the relentless strengthening of the loonie threatening external demand, exports are projected to remain below their pre-recession peak until 2014. The BOC forecasts growth from 2012-2014 at 2.1%, 2.3% and 2.5%, respectively. Inflation is projected to decline given the drop in gasoline prices and futures suggesting even lower oil prices. The central bank expects total CPI inflation to remain below 2% before returning to target around mid 2013. High inflation will slow down global momentum and growth in Canadian household spending. With global factors like the turmoil in the Eurozone, and Ben Bernanke, forecasting slow progress in reducing US unemployment we believe that it is unlikely that Carney will actually go through with raising rates. Tonight Australia will release its data for NAB business confidence and RBA foreign exchange transaction.
JPY: BoJ Minutes Reflect Ongoing Concerns
The Japanese Yen strengthened against the greenback, euro, sterling, loonie, i and Swiss franc while it remained flat against the Aussie and kiwi. The Bank of Japan bought government bonds yielding 0.1% showing possibilities of gaining negative returns. This shows that the central bank is struggling to buy enough bonds to expand its stimulus program. On July 12th the BOJ said it would buy more treasury bills instead of adding extra money. This shows that the bank is still committed to purchasing more assets even though it failed to attract enough bids in its rinban purchases on July 6th. This six month operation did not reach its bid goal 14 times in a row on July 10th. A Japanese Finance Ministry official who remained anonymous said Japan purchased 3% debt by the EFSF which is 45 million euros out of 1.5 billion euros in six month bills. Last night the BOJ released its minutes for its June 14 and 15 meeting and it revealed that members "shared the view that Japan's economy faced the critical challenge of overcoming deflation and returning to a sustainable growth path with price stability." The BOJ noted that it will continue to do what's necessary to "conduct monetary policy in an appropriate matter," and reiterated that it is a priority to maintain stability of Japan's economy while paying attention to developments in global financial markets. All industry activity index, leading index, and department store sales are expected to be released tomorrow.