- EUR Vulnerable to 3 Key Events on Wednesday
- USD: Moody's Downgrade Threat No Big Deal
- GBP: Lifted by UK Trade Data, Employment Next
- CAD: Unfazed by Weaker Trade Data
- NZD: RBNZ Rate Decision on Tap
- AUD: Shrugs Off Drop in Business Confidence
- JPY: GDP Growth Figures Revised Lower
EUR Vulnerable to 3 Key Events on Wednesday
The euro traded higher against the U.S. dollar in anticipation of a positive outcome to the German Constitutional court ruling on Wednesday. Moody's threat to downgrade U.S. debt also sent the U.S. dollar tumbling against all major currencies. The dollar dropped to its lowest level against the Japanese Yen since June 1 and its lowest level in more than 13 months against the Canadian dollar. While concerns about the U.S.' credit quality and the possibility of Quantitative Easing has played a large role in the strength of the EUR/USD, the next 24 hours will be all about Europe. Unfavorable outcomes from 3 key events on Wednesday could have a major impact on the EUR/USD.
- German Constitutional Court - The most closely watched and highest profile event will be the German Constitutional Court ruling at 4:00AM ET or 8:00 GMT. We don't expect the court to stand in the way of further gains in the euro. For a detailed analysis of what we expect from the ruling, read our special report on why Eurozone Politics Won't Block a EUR Rally to 1.30. There was some concern yesterday that the vote could be delayed but this morning, the Court confirmed that an appeal by MP Gauweiler won't stall their verdict tomorrow. The political and economic consequences of blocking the European Stability Mechanism are just too severe for the 8 scarlet robed justices of Germany's top court to say no which is why we believe that politics won't dampen the rally in euro. There is a small chance that they could impose additional conditions but this decision would more likely come with their vote on the Constitutionality of the ESM at the end of the year than tomorrow's decision on an injunction to block the ESM.
- Banking Union Proposal - However an hour before the court rules, the European Union will offer 2 proposals for a Banking Union. One of the drafts that have been leaked to the market gives the European Central Bank widespread power over the region's banking sector. This includes the right to authorize, assess and withdraw the licenses of banks as well as impose capital requirements and conduct stress tests. There is very little debate about the ECB being the central authority in the banking union but the critical question tomorrow is the amount of details that will be provided in the proposals. The more they provide, the better it will be for the currency.
- Dutch Elections - The third key event for Europe tomorrow is the Dutch general election. Since every country in the Eurozone has a vote on bailouts and the region's crisis response measures, the outcome of the election could impact the euro. Polls open at 5:30 GMT and close at 19:00 GMT, but final results will not be published until Monday. Centrists parties led by Prime Minister Mark Rutte is leading in the polls but not by much. If the centrists lose any seats in the Lower House, it could create uncertainty for Europe and affect their focus on austerity and support for further bailouts. With 21 parties represented on the ballot, a majority government is unlikely. A coalition government will be formed but it may be weeks if not months before the new government is formed. With 3 important political events on calendar tomorrow, it should be an active day for the euro.
USD: Moody's Downgrade Threat No Big Deal
The summer is over and rating agencies are back in the game, spewing out threats and driving volatility in the currency market. The latest weakness in the U.S. dollar was triggered by Moody's warning that the U.S.' sovereign credit rating could be downgraded if Congress fails to reach a debt deal to avoid the fiscal cliff next year. We have written at length about the dangers of the fiscal cliff but Moody's warning isn't a deal killer for the dollar. Although the greenback sold off aggressively, we attribute more of the weakness to QE3 expectations than the announcement. Not only is Moody's stating the obvious, which is that an expiration of the Bush era tax cuts would cause a fiscal cliff that could be disastrous for the U.S. economy but we have been down this road before and the dollar survived a downgrade from Standard & Poor's. Both the Republicans and Democrats know that addressing the fiscal cliff is top priority after the elections and between now and then, no decisions will be made. According to Moody's the U.S. is currently rated AAA so a downgrade would only put their ratings in line with Standard & Poor's who downgraded U.S. debt in August 2011 from AAA to AA+. The Federal Reserve's monetary policy decision on Thursday will have a much larger impact on the outlook of the U.S. dollar than the warning from Moody's. Meanwhile better than expected trade numbers did not help the U.S. dollar this morning. While the U.S. trade deficit held steady in the month of June, widening only marginally to -$42.0B from -41.9B, the increase was marginal compared to $44.0B forecast and the deficit in June was revised lower. Unfortunately this was still the first increase in four months and the upside surprise was caused by a 1.0 percent drop in exports and a 0.8 percent drop in imports. This tells us that internal and external demand is weakening which doesn't paint a healthy outlook for the U.S. economy. Nonetheless consumer confidence improved significantly according to the IBD/TIPP Economic Optimism index, which jumped from 45.6 to 51.8 in the month of September. The U.S. economic calendar is light tomorrow with only import prices scheduled for release.
GBP: Lifted by UK Trade Data, Employment Next
The British pound traded higher against the U.S. dollar on the back of better than expected data and broad dollar weakness. According to our colleague Boris Schlossberg, the "UK Trade Balance printed much better than forecast coming in at -7.1B vs. -8.9B eyed as exports skyrocketed by 9.3% led by surge in oil and diamonds. Even excluding oil and diamond exports the Trade deficit narrowed to 6.725B from 8.433B - its best reading since December 2009. The surprising strength in UK trade was also driven by an increase in exports with non -EU countries, which climbed by 11% while imports fell by 5.3%. The improvement in UK trade balance bodes well for growth in Q3 of this year as the marked reduction on deficit will likely contribute positively to GDP." Unemployment numbers are due for release tomorrow and we are looking for an improvement in the labor market. Economists expect jobless claims to be unchanged but the small improvement in the manufacturing and service sector employment reports point to the possibility of a small dip which would be positive for the pound. The unemployment rate is expected to hold steady but average weekly earnings should remain soft.
CAD: Unfazed by Weaker Trade Data
The Canadian dollar rose to a 13 month high against the U.S. dollar despite weaker trade numbers. Canada's trade deficit widened more than expected in July from -1.93B to -2.34B. Given the healthy IVEY PMI figures, economists had been looking for an improvement but a decline in energy exports led to a drop in both export and import volumes. Like the U.S., a decline in export and imports isn't good news for Canada's economy. Housing starts on the other hand rose by 224.9k which was more than expected and suggests that the country's real estate sector continues to improve. The Australian and New Zealand dollars also performed extremely well, rising approximately 1 percent against the greenback. Last night's economic reports showed businesses in Australia feeling more confident about current conditions but more concerned about future conditions. Slower growth in China continues to weigh on the sentiment of Australia companies. Chinese money supply came in weaker than expected but failed to have much impact on the AUD and NZD. Consumer confidence numbers from Australia are due for release this evening followed by the Reserve Bank of New Zealand interest rate announcement at 5:00pm ET or 21:00 GMT. The RBNZ is widely expected to leave rates unchanged but could express a bit more caution given the recent performance of the Australian and Chinese economies.
JPY: Yen Strength Starting to Reach Intervention Territory
It was a mixed day for the Japanese Yen, which traded higher against the British pound, U.S. and Canadian dollars and lower against the euro, Swiss Franc, Australian and New Zealand dollars. According to the latest Japanese economic reports, conditions at large manufacturing companies improved in the third quarter. While this is at odds with other economic reports, it is nonetheless confirmed by machine tool orders, which fell at a slower pace in the month of August. All was quiet in Japan with the price action of the Japanese Yen largely driven by dollar and euro flows. To the frustration of Japanese officials, USD/JPY broke below 78. While we haven't heard a peep from the Japanese government, there is no question that the rising Yen is making them anxious. For investors, the main question now is how far the Ministry of Finance will allow USD/JPY to fall before asking the Bank of Japan to intervene. In our opinion, 75.50 is their line in the sand. Japanese officials will be watching Thursday's Federal Reserve announcement closely because the dollar's reaction to the Fed's decision will determine how quickly they need to act.