TODAY'S BIGGEST PERCENTAGE MOVERS
THE STORIES IN THE CURRENCY MARKET
- EUR: THE PROMISE OF DECISIONS NO LONGER SUFFICE
- USD: NOTHING NEW FROM FOMC MINUTES, QE3 STILL ON TABLE
- GBP: BOE UNDECIDED ON NEED FOR MORE QE
- AUD: POSSIBLE IMPROVEMENT IN LABOR CONDITIONS
- NZD: DROP IN BUSINESS PMI
- CAD: CANADIAN EXISTING HOME SALES DECLINES
- JPY: FLAT ECONOMIC GROWTH
EXPECTATIONS FOR UPCOMING FED MEETINGS
|CURRENT US INTEREST RATE: 0.25%|
|03/13 Meeting||04/25 Meeting|
|CUT TO 0BP||52.0%||50.9%|
|HIKE TO 50BP||0.0%||1.0%|
With stocks falling sharply, the U.S. dollar ended the day either higher or unchanged against all of the major currencies. Early gains in the AUD, NZD, GBP and CAD were wiped out as investors flocked into the safety of U.S. dollars. It was a busy day for U.S. data that provide little in the way of clarity on the outlook for monetary policy. All we know is that the door remains open for QE3 but Fed officials are divided on whether additional stimulus is really necessary. A few members of the policy making committee thought that the Fed could start extending the maturity of the portfolio "before long," or in 2012 according to the minutes released today. However, the members were more receptive to this idea if economic conditions were to deteriorate or if inflation seemed likely to remain below 2 percent. In other words, the decision will depend on incoming economic data. Fed officials also indicated that there would be no effort to shrink the balance sheet until the end of 2014, although committee member Jeff Lacker was opposed to announcing the time frame with such unprecedented clarity. Some Fed officials noted that while some economic conditions had shown further improvement in labor market conditions, the economy's progress was still frustratingly slow and the unemployment rate remained above historical levels. U.S. growth could be restrained this year by slower global economic growth, in particular as European countries slash their budgets to comply with austerity measures and solve the debt crisis. This morning's mixed U.S. economic data had very little impact on the U.S. dollar. Based on the Empire State manufacturing survey, manufacturing activity in the NY region expanded for the third consecutive month in February to its fastest pace since June 2010. Unfortunately this positive trend in the manufacturing sector was not confirmed by the industrial production report. Last month, IP growth was flat due to declines in utility and mining. Capacity utilization also slowed to 78.5 from 78.6 percent. According to the Treasury International Capital Flow report, total foreign investment into the U.S. totaled $87.1B in the month of January. Of that amount, $17.9B were for purchases of long term equities, notes and bonds. The rest of the increase represented a change in Banks own net dollar denominated liabilities. The details of the report showed continued selling of U.S. dollars by China, the U.K., hedge funds in the Caribbean and Russia. Thursday morning will be another busy one in the U.S. with weekly jobless claims, housing starts, building permits, producer prices and the Philly Fed index scheduled for release.
The British pound strengthened against the euro and remained relatively unchanged against the U.S dollar. U.K. unemployment held at a 16-year high according to the ILO Unemployment Rate. The faltering economy continues to take its toll on the labor market with the claimant count rising by by 48,000 over the last three months of 2011, taking the jobless total to 2.7 million. The number of people claiming unemployment assistance rose by 6,900 in January to 1.6 million, the 11 th consecutive monthly increase. Frustrated by Britain's slow and uncertain recovery, Bank of England Governor Mervyn King said policy makers can expand their stimulus program further if needed to ward off economic threats posed by the euro region's debt crisis. The Bank of England certainly has the capacity to increase asset purchases, a note which King made clear when he presented the bank's quarterly Inflation Report. The central bank expanded its bond-purchase program to 325 billion pounds ($510 billion) this month after the economy shrank in the fourth quarter. Policy makers raised their forecast for inflation today, predicting an undershoot of their 2 percent goal in two years and an even chance of reaching it in three years. The Bank of England also said that failure to implement reforms in the euro area "could trigger a disorderly outcome and result in sharply lower growth" in the region. Although the February Inflation report retains a bias towards easing, no answers were provided on whether the central bank will increase in QE in May. The increase in their CPI projection suggests that the need has declined slightly. Consumer confidence numbers are due for release this evening and sentiment is expected to have increased slightly in January thanks to the rally in equities and easing of credit conditions.
The Canadian, Australian, and New Zealand ended the day unchanged against the greenback. Australia received a surprise jump in consumer confidence as households became more upbeat on the outlook for the economy and their own finances even as the Reserve Bank held back on cutting rates again. The consumer confidence index rose for a second straight month and climbed 4.2 percent in February to 101.1, showing optimists finally outnumbering pessimists. This is a strong result and provides some lagged recognition from consumers of the two rate cuts the Reserve Bank delivered to mortgage and business borrowers. However, the RBA's surprise decision last week to keep rates on hold many have weighed on sentiment. New motor vehicle sales increased as well, rising 1.3 percent in January after falling 2.7 percent in December of last year. Qantas Airways Ltd., must "adapt or die," Chief Executive Officer Alan Joyce told Australian lawmakers last week as the nation's biggest carrier confronts rising costs on unprofitable international flights. Qantas is also missing out on the massively underserved domestic flight market and fast-growing routes into Shanghai and Beijing. Australian employment numbers are due for release this evening and given the rise in consumer confidence, we are looking forward to an improvement in the labor market. Canadian January existing home sales fell 4.5 percent, the first decline in five months, according to the Canadian Real Estate Association. The housing market should be steady this year with moderate economic growth and low mortgage rates. The Canadian dollar is receiving a boost as crude oil, the nation's biggest export, rose to the highest level in a month. Oil rose after a report that Iran cut oil exports to six European countries. The action followed a European Union decision to ban imports of Iranian oil beginning in July. Vancouver would be able to handle larger tankers that could receive crude oil from an expanded Kinder Morgan Inc. pipeline, allowing Canada to boost energy shipments to Asia, according to the head of the city's port authority. Canada's largest port handles an oil tanker every week and probably needs new harbor dredging to handle larger ships. Nonetheless, pressure to increase trade is coming from Canadian oil drillers and the project should advance with no impediment in sight. New Zealand on the other hand saw business activity grow at a slower pace in January according to their latest PMI report. The business PMI index dropped to 50.5 from 51.6 the previous month.
The Japanese yen strengthened held steady or against all of the major currencies today. Last night, the Bank of Japan released their monthly report of recent economic and financial developments for the month of February. Economic growth has been more or less flat, primarily due to a slowdown in overseas economies and the continued strength of the yen. The European debt crisis is causing additional pressure on Japanese exporters. The BoJ also issued a bleak outlook for the economy, saying activity will remain more or less flat for the near term. Following that, the economy is expected to return to a modest recovery path prompted by an improvement in overseas economies. The BoJ's monetary easing was a positive surprise yesterday and is materially depreciating the yen. The Bank of Japan's decision to expand its asset purchase program has started causing companies, especially exporters, to boost their earnings outlook. However, the chip-manufacturing industry continues to struggle. Elpida Memory Inc., a Japanese memory chip maker, said it is uncertain whether it will be able to survive because it lacks financing for debt due in April. The company hasn't been able to reach a deal with Japan's trade ministry, the Development Bank of Japan and its main lenders. Elpida and other companies in the industry are finding it difficult to repay debts as chip prices have plunged and show little sign of recovering. The company plans to shift some domestic production to Taiwan to reduce its vulnerability to a stronger yen. This strategic outflow of domestic production has been gaining momentum among Japanese businesses and will continue unless the yen weakens to a level to make Japanese products competitive in foreign markets. The BoJ is set to release the minutes of its monetary policy meeting held on January 23 rd and 24 th later this week. We should expect to see a shift in the policymakers' stance toward more easing.
AUD/USD: Currency in Play for Next 24 Hours