#EURO: AT RISK FOR A CORRECTION? Daily FX Market Roundup 08-26-12 Euro: At Risk for a Correction? USD: Brace for the Potential of More US Data Disappointments GBP: Carney to Deliver First Major Monetary Policy Speech AUD/NZD: Potential Medium Term Top AUD: Gold Hits 2 Month High above $1400 CAD: Testing 1.05 JPY: Investors Cut Back on Yen Shorts Euro: At Risk for a Correction? For the past 2 weeks, the euro has been hovering near 6-month highs against the U.S. dollar and given the recent rise in U.S. yields and the prospect of Fed tapering, some investors are wondering if the euro is due for a correction and the dollar is due for a bounce. While rising U.S. yields should attract demand for dollars, investors may have to wait if they want to see a correction because there’s a significant amount of top tier German economic reports scheduled for release this week. We believe these reports will show the Eurozone recovery gaining momentum, which should lend support to the euro and could even give the currency the push that it needs to close above 1.34 in a meaningful way. In other words, we don’t expect a significant EUR/USD correction this week. The last unofficial week of summer usually means less volume traded and lower liquidity in the forex market. For those of us that will be on the desk watching quotes, thin trading conditions could exacerbate the market’s reaction to German data. The IFO report is scheduled for release on Tuesday and based on the rise in PMI manufacturing, increase in industrial production and factory orders, German businesses should have grown more optimistic in the month of August. Last week’s PMI numbers confirm that the recovery is gaining momentum after the Eurozone exited from recession last quarter and if there are further improvements in the German IFO, retail sales and unemployment reports, investors could start to price in less pessimism from the European Central Bank next week. In the meantime the euro ended the day unchanged against the U.S. dollar despite a 2% slide in in Italian stocks and concerns that Greece could need another round of aid. Silvio Berlusconi is no longer leading the government but he continues to cause havoc for the markets. Members of his centre-right Freedom Party threatened to bring down the government by calling early elections if Berlusconi is pushed out of parliament after being convicted of tax fraud. The vote on evicting him from the government is scheduled for October. If new elections are held, there may be no majority government and that could mean a complete standstill for fiscal reforms in Italy. Aside from stocks, Italian bonds also moved sharply lower, driving 10 year yields up 7bp. As for Greece, German Finance Minister Schaeuble said on Sunday that debate about a new debt cut prompted him to say that the country will need further aid. German Chancellor Merkel agrees that a debt cut would be dangerous and could potentially unsettle the market. Greece on the other hand continues to deny that debt levels are a concern while ECB Board Member Asmussen called on Greece to press ahead with reforms despite the pain. USD: Brace for the Potential of More US Data Disappointments It was a quiet day in the forex market with the dollar ending the North American trading session unchanged against most of the major currencies. Early gains in the greenback were erased after the release of weaker than expected durable goods orders and a slide in U.S. Treasury yields. The only piece of economic data released from North America today was durable goods and unfortunately orders fell 7.3% in the month of July, a sign that manufacturing activity could be weakening. Economists had been looking for only a 4% drop but aircraft orders dragged the overall index lower, causing the dollar to sell off slightly on the report. Excluding transportation, durable goods orders fell 0.6% as demand for computer and electronics weakened. Disappointments in economic data has almost become the norm for the U.S. which is part of the reason why investors are skeptical about the size and scope that asset purchases will reduced in the coming months. The Conference Board’s consumer confidence index is scheduled for release tomorrow and there’s a reasonable chance that the data will also be weak, making it difficult for USD/JPY to rally. Earlier surveys by Investor Business Daily and the University of Michigan reported a decline in sentiment in the month of August, which isn’t surprising given the recent slide in U.S. stocks and the deterioration in economic data this month. Meanwhile keep an eye on emerging market currencies because the strength of the dollar hit the currencies of countries with high current account deficits the hardest. Even after launching a $60B currency intervention program last week, central banks in countries like Brazil still need to do more to attract demand which is why they are widely expected to raise interest rates this week to stabilize the real against the dollar. GBP: Carney to Deliver First Major Monetary Policy Speech With U.K. markets closed for an August bank holiday, trading in sterling has been very quiet. There’s not much in the way of U.K. data on the calendar this week but sterling could see some volatility from Bank of England Governor Carney’s first major speech on monetary policy on Wednesday. The new governor wasted no time in overhauling processes in the U.K. central bank and he will most likely be asked a multitude of questions about his commitment to keep interest rates low under his new forward guidance policy. We know that the BoE has no intention of raising interest rates until 2016 but recent improvements in U.K. data has led investors to price in a move as early as the first quarter of 2015. The central bank is skeptical about whether the recovery can sustain its current momentum, a view that many see as overly pessimistic particularly after upward revisions to GDP growth. As we expect the central bank governor to remain dovish, we also feel that the recent pullback in the GBP/USD could be the beginning of a steeper slide that could take the currency pair down to 1.54. AUD/NZD: Potential Medium Term Top The best performing currency today was the New Zealand dollar, which may be surprising to some traders because New Zealand’s trade deficit ballooned in the month of July. Economists had been looking for the country’s trade surplus to turn into a small deficit but due to weakness in exports and a rise in imports, New Zealand reported its largest trade deficit since September 2012. The deterioration in exports reflected weaker demand from Australia and China. Dairy exports in particular dropped 37%. Imports increased because of higher crude prices and a boost in aircraft orders. While the NZD initially fell on the report, the currency recovered very quickly because the increase in imports reflects stronger domestic demand. Compared to Australia, the outlook for New Zealand’s economy is still brighter with some economists even calling for New Zealand to be the best performing G10 nation next year. While we feel that this call may be a bit bold, we agree that the NZD is poised for further gains especially against the AUD. After hitting a 4 month low at the end of last month, AUD/NZD has staged a decent recovery up to 1.16. The currency pair is struggling to rally beyond this former support now resistance level and we feel that this could mark a medium term top for the pair. No economic reports are expected from the 3 commodity producing countries over the next 24 hours so traders should keep their eyes on the U.S. dollar and gold. The price of gold exceeded $1400 an ounce for the first time in 2 months. If this level holds, we could see a further move towards $1500, which could rally the AUD/USD. JPY: Investors Cut Back on Yen Shorts The Japanese Yen traded lower against all of the major currencies today with exception of the New Zealand dollar. Like the Eurozone, this is a busy week for Japan but unlike the euro, Japanese data tends to have less impact on the currency. Investors continue to look for reasons why USD/JPY refuses to rise. Last Friday’s CFTC IMM data showed speculators reducing their short yen long dollar positions and some are saying that the sale of USD/JPY could be capping the move in the pair. The Bank of Japan also released a report on inter-office assets in foreign banks and according to JPMorgan global investors unwound several billion of JPY shorts in June. The fear is that if emerging markets destabilize further, we could more investors cut their Yen shorts. This is certainly a risk for USD/JPY that is worth monitoring but we still believe that real money flows could find 3% yield too attractive to ignore. Small business confidence is the only piece of Japanese data scheduled for release this evening.
Posted on: Mon, 26 Aug 2013 21:43:43 +0000
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