- EUR/USD - Gunning for 1.50?
- EUR: Is This Enough to Save Spain?
- GBP: Busy Week Ahead for the U.K. NZD: Outsized Volatility Means Larger Reversal
- CAD: Surprise Decline in Manufacturing Sales
- AUD: Gold and Oil Ends the Day Well Off earlier Highs
- Rally in USDJPY Eases Intervention Fears
EUR/USD - Gunning for 1.50?
Lets start by saying that 1.50 is an ambitious target and only the reason why we used such a catchy title is because when we have such strong moves in currencies or any asset class for that matter, investors start focusing on those "big round numbers" and 1.50 EUR/USD is one of them. There's a long way to go from here to 1.50 and I don't think that the EUR/USD has what it takes to get there. In order for EUR/USD to rise to 1.50 like it did back in 2011, we need the Federal Reserve and the ECB to be running significantly divergent monetary policies. Between January and of April 2011, the EUR/USD was on a tear, rallying from a low of 1.2860 to a high just shy of 1.50 at 1.4940. During that time the ECB raised interest rates as the Federal Reserve was in the process of implementing QE2. Obviously that is not where we are at right now and while we believe that the EUR/USD could have more room to rise, 1.35 is a far more realistic target than 1.50.
There is very little on the economic calendar next week that will alter the outlook for the U.S. dollar. When it comes to the FX market, sentiment is oftentimes the number one driver of trends. Currency traders like what the Federal Reserve has done and skeptics have to respect that because we cannot underestimate the psychological impact of the word "unlimited." While the ECB and the Federal Reserve can't have a program that goes on forever, their promise to keep buying for as long as it takes sends a strong message to the market that they are in it to win it. They have no fear of throwing as much money for as long as it takes to stabilize and jump start their economies. For the Federal Reserve in particular, the focus is on the labor market. Will QE3 be enough? If politicians keep acting like children and don't grow up, putting their differences aside to take care of the fiscal issues, the flood of cheap money and low interest rates won't be enough.
The Empire State and Philly Fed surveys are scheduled for release next week along with current account, the Treasury International Capital flow report and housing market numbers. None of these reports are expected to have much impact on the U.S. dollar, just like this morning's retail sales and CPI report. Consumer spending and consumer price figures were unfairly distorted by higher gas prices. Consumption and inflation increased in the month of August but if we strip out the gas component of both reports, demand and price pressures were muted. Unfortunately higher gas prices acts like a tax for consumers which bad news for the economy. The retail sales and consumer price reports give the Federal Reserve very little reason to doubt their decision yesterday to increase monetary stimulus. Retail sales rose 0.9% in the month of August, which was slightly more than expected but not that impressive when taking into account the downward revision to the past month's report. Also, the higher cost of gas was responsible for a large part of the gains because excluding gas station receipts, consumer spending rose only 0.3%. The consumer price report showed a similar influence by gas prices. CPI rose 0.6% last month but stripping out the costs of food and energy, prices rose a mere 0.1% and we know gas is to blame because excluding food, prices increased 0.7%. Industrial production on the other hand dropped 1.2% last month but any negative sentiment from this report was offset by the sharp improvement in consumer confidence. According to the University of Michigan, consumer sentiment rose to its highest level in 5 years, which is a bit hard to believe. While there could be a bit of retracement in currencies next week, overall we expect the risk rally to continue.
EUR: Is This Enough to Save Spain?
Despite the lack of major European economic data this week, the EUR/USD enjoyed a fabulous rally. There's no question that the move higher was a combination of short covering and pure EUR/USD demand and we won't know if all short positions have been cleared by this move until next week. Nonetheless, the latest CFTC IMM data continues to show a reduction in short positions with more likely to have been closed between Tuesday and Friday (the CFTC data is as of Tues). The big question on everyone's mind is how much further the EUR/USD can rise and we touched on this in the paragraph above. For Europe, the real question is whether the ECB's commitment to buy European bonds, the improvement in risk appetite and the rally in equities are enough to save Spain from a sovereign bailout. Since the ECB's announcement, Spanish 10 year bond yields have plunged to a 5 month low. Yields are currently at 5.73%, down from a high of 7.51% 6 weeks ago. As long as yields stay below 6%, Spain may be able to avoid a sovereign bailout but today, yields rose 15bp even though the EUR/USD and stocks rallied. We are a bit concerned by this price action but won't be discouraged until yields rise above 6%. European finance ministers are currently meeting to discuss Spain, Italy, Portugal and Greece and no major headlines are expected. They have already said they expect to decide on Portugal's next disbursement at their October meeting. In order for the ECB's bond purchase program to work, the Spanish government would need to ask for help first and Prime Minister Rajoy is extremely reluctant to do so. In fact, all politicians in Europe want to avoid doing more, regardless of whether it is to offer or accept help unless its absolutely necessary. German Chancellor Merkel and Monti agree that it has been a good week for Europe and if we have a few more of these, European officials may drag their feet even longer. Eurozone current account and trade numbers are on the calendar next week along with the German ZEW survey, producer prices and PMI numbers. The PMIs and ZEW will be most important releases for the euro next week.
GBP: Busy Week Ahead for the U.K.
The British pound continued to underperform the euro in what we believe is a progressive swap of funds out of sterling and into euros. It has been a quiet week in the U.K. but that should change in the coming week as U.K. data dominates the calendar. We have consumer prices, retail sales, public sector finances and the minutes from the most recent monetary policy meeting scheduled for release. Over the past week the markets have been obsessed by monetary policy actions from the European Central Bank and the Federal Reserve. Lost in the shuffle was the Bank of England's decision. This week we will learn if the troubles in the global economy have made U.K. policymakers more willing to increase stimulus. Having boosted their Quantitative Easing program back in June, we don't expect MPC members to be actively thinking about easing again. They'll probably be dovish but not ready to pull trigger so soon. The market's response to the Federal Reserve and ECB's announcements will only reduce the pressure on the BoE to ease. It will be interesting to see how consumer spending held up now that the support from the Olympics has faded.
NZD: Outsized Volatility Means Larger Reversal
While the Canadian, Australian and New Zealand dollars soared to fresh highs against the greenback, profit taking towards the end of the North American trading session stripped commodity currencies of a large part of their gains and even turned the rally in the NZD/USD into losses. Oil and gold prices also ended the day with gains but well off their highs which explains part of the move in the comm dollars. Consumer confidence in New Zealand weakened this month according to ANZ bank. Families felt more pessimistic about their finances and less optimistic about the economy 5 years forward. This is disappointing but not enough to explain the underperformance of the NZD/USD. Instead, the main reason why the New Zealand dollar turned negative today is simple. The currency pair was a shining star, rising more than 1.3% on Thursday and its increased volatility has caused a larger reversal compared to some of the other pairs. No economic data was released from Australia but Canadian manufacturing sales dropped 1.5% in June. In the coming week, we have very little Canadian, Australian, New Zealand data on the calendar. In fact, the only piece of noteworthy data will be Canadian consumer prices at the end of the week. As a result, the commodity currencies will trade just as they have today on risk appetite. If the risk rally continues, these pairs will extend their gains, if it reverses, they will retreat as well. Chinese property prices and the HSBC Flash Manufacturing PMI report will also be released next week.
Rally in USDJPY Eases Intervention Fears
All of the major currency pairs traded higher today including USD/JPY. We have already heard from Bank of Japan officials and we know they are not pleased with the recent rise in the Yen. Finance Minister Azumi said last night that they are ready to take "decisive" action against excessive one-sided moves in the Yen. Verbal intervention from Japanese officials usually falls on deaf ears and is ignored by the markets. The Yen has traded lower against all of the major currencies today but this is a result of risk appetite and not in reaction to Azumi's warning. Intervention is not a major risk for USD/JPY until the currency pair falls below 77 and today's rally has taken us above that point enough to ease the concerns of policymakers. The last time the Bank of Japan intervened was in November 2011 and the level they came into the market at was between 75.50 and 76.50. If they were to intervene again, it would probably be in this range as well. The Bank of Japan has a monetary policy announcement next week and according to the Nikkei, one of the country's leading newspapers, the Bank of Japan is concerned about slowing exports and could cut its view on exports when they meet on September 19 and release their economic report on September 20th.