USD – No Help From the Fed
The U.S. dollar received very little support from the FOMC minutes or Bernanke’s testimony. Interestingly enough, this was not because the central bank did not talk about tapering, quite the contrary.
The minutes revealed a healthy discussion on the topic. Instead, the problem was that there was quite a bit of divergence in views at the last meeting. While Bernanke said the central bank could begin tapering in 2013 and end asset purchases in 2014, the notes from the discussion showed more inconsistency.
The minutes said many officials wanted to see labor gains before tapering begins but the confusion came when they also said half see bond buying end this year and “many” others saw bond buying into 2014. What this screams of is more contradiction than agreement inside the Fed. Reading between the lines, a good number of policymakers want to start reducing asset purchases this year and end it completely by December but there’s also a good number who want it to continue into 2014. So the compromise could be exactly what Bernanke described at the last meeting, which would be to start the process of tapering this year but hold off on ending purchases until 2014 when there is evidence of a stronger labor market recovery.
We still believe that the Fed will start tapering in September barring any major shocks to the economy. At his speech in Boston, Bernanke didn’t say much outside of reminding the market that policy will remain highly accommodative for the foreseeable future and a rate hike won’t come until well after the jobless rate hits 6.5%. Unfortunately the dollar did not receive the unambiguous sign from the Fed about the timing for tapering that it needed to extend higher. So instead profit taking has hit the pair, which dropped below 100 against the Japanese Yen and came within of a whisker of 1.30 against the euro. Looking ahead, while we view the pullback in the greenback as temporary, the lack of significant catalysts for the rest of the week could mean additional profit taking or losses for the dollar.
EUR – Economic Data Continues to Weaken
The euro rebounded against the U.S. dollar yesterday despite weak economic data. French industrial production dropped 0.4% in May while manufacturing production fell 0.8% and the country’s current account deficit widened to -4.1B from -2.8B. These numbers are just as ugly as the reports from Germany earlier this week. While bond yields edged higher and European stocks remain virtually unchanged the deterioration in economic data should not be ignored by investors. The European Central Bank has made it clear that they are ready to increase stimulus if growth in the region slows further. We are beginning to see evidence of that and while it is early and the data is a bit dated since it is for May, we are watching carefully to see if the situation worsens. If more economic reports surprise to the downside, the ECB could start preparing the market for another rate cut or a new LTRO program. So far, the EUR/USD continues to hold above its key support level of 1.2746. We feel that it is only a matter of time before the support is broken, paving the way for a stronger move down to 1.25.
AUD – Disturbing Chinese Data Builds Case for RBA Easing
The Australian and New Zealand dollars ended the day yesterday unchanged against the greenback despite Tuesday night’s Chinese economic reports which were very disturbing. While the trade surplus increased from $20.42B to $27.12B, exports and imports plunged in the month of June. Economists had been looking for growth on both fronts but exports dropped by the largest amount since November 2009 while imports fell the most since February. These declines reflect weaker demand domestically and abroad, a dangerous mix for not only China’s economy but that of the world. The AUD did not have a significant reaction at the onset because iron ore prices increased and the currency is deeply oversold but with time, investors should realize that the combination of higher iron ore prices could weaken Chinese demand for the commodity even further. In addition to the Chinese trade numbers, consumer confidence in Australia also dropped 0.1%. At this stage, the case for another rate hike from the Reserve Bank is growing. Australian employment numbers are scheduled for release and based on the PMIs, there should be a small increase but a much larger rise is needed to stem the slide the AUD. Meanwhile the Canadian dollar traded higher for the third day in a row thanks to rising oil prices. In the past 2.5 weeks, the price of oil has surged more than 12% from $93 a barrel to a one year high just shy of $106 a barrel yesterday.
GBP – Speeches From BoE Miles and Chancellor Osborne
With no major U.K. economic reports released yesterday, the British pound traded higher against the U.S. dollar and remained steady against the euro. It may be a quiet week for U.K. data but Mark Carney’s decision to make the central bank’s dovish monetary policy bias clear at the last Bank of England meeting left a mark on the currency, making it difficult for sterling to rally. No data is expected today but Monetary Policy Committee member Miles will be speaking in London while Chancellor Osborne is scheduled is testify to lawmakers on 2015-16 spending plans. Miles has consistently voted for additional bond purchases since November of last year so his comments are likely to be dovish. George Osborne on the other hand outlined his plans to cut spending by GBP11.5 billion in the 2015/16 fiscal year last month. Many sectors will face painful spending cuts but we don’t expect anything new to be revealed in his testimony to lawmakers so this should be a non event for the pound.