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USD: FOMC Minutes vs. Economic Data

Last updated 10/19/2011 4:35 PM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• USD: FOMC MINUTES VS. ECONOMIC DATA
• EUR: TALK IS NOT THAT CHEAP
• GBP: ALL EYES ON RETAIL SALES
• CAD: LEADING INDICATORS FALL 0.1 PERCENT
• AUD: LEADING INDICATORS RISE THANKS TO CORP PROFITS
• NZD: BENEFITS FROM RISK, LITTLE CHANGE IN GOLD AND OIL
• JPY: ECONOMIC DATA SHOWS MODEST RECOVERY FROM QUAKE

EXPECTATIONS FOR UPCOMING FED MEETINGS

USD: FOMC MINUTES VS. ECONOMIC DATA

It has been another volatile day in the financial markets with stronger U.S. economic data offset by a pessimistic Beige Book report.   According to the 12 Fed Districts, even though economic activity expanded modestly in the month of September, consumer and business spending is weak and wages remain under pressure.   The words uncertain or uncertainty was used more than 20 times in the report as various contacts noted a weaker or more uncertain outlook for U.S. companies.   This goes to show how worried the Federal Reserve still is about the outlook for the U.S. economy and undermines the recent improvements in U.S. data.   With that in mind however, the softer Beige Book report in the face of stronger data only makes the Federal Reserve’s decision about QE3 all that more difficult.   The price action in the foreign exchange market suggests that investors are sick and tired of being pessimistic and are desperate for some good news.   Recent economic reports from the U.S. have given investors hope that the U.S. economy is stabilizing and they to believe that the worst is behind us.   The past few months have been tough because non-farm payrolls were so weak but the rebound in payrolls last month has been followed by consistent improvements in other economic reports. Consistency is extremely important for economic data especially after months of conflicting reports.   Not only did the labor market improve in September but there were also signs of life in the labor and now housing markets.   This is not to say that the U.S. economy is gaining momentum and that from here on forward the recovery will strengthen – instead it will still be a long road to recovery but for the time being, there is reason to believe that risks have diminished.   For the Federal Reserve QE3 is not an easy solution from both a political and economic perspective.   It is the most powerful tool in their arsenal and one that they keep on hand for as long as they can. For this reason, we strongly believe that the recent improvements in economic data significantly weaken the argument for QE3. There has been a lot of talk about tying interest rates to a piece of economic data and even though that is also a big decision, it could be the Fed’s preferred option for November with QE3 being the perfect holiday present to the markets in December.  

The latest economic data shows inflationary pressures slowing slightly in the month of September which means that producers are having a tough time passing higher costs onto consumers. CPI rose 0.3 percent in September with core prices rising 0.1 percent. If you recall, PPI rose 0.8 percent last month. This disconnect between PPI and CPI shows that U.S. corporations have chosen to absorb the higher costs instead of passing it onto consumers in fear of driving demand even lower. For the consumer, lower prices puts less strain on the cost of living at a time when most Americans are struggling to make ends meet. Housing starts were also very strong, rising 15 percent in September. Although starts can be volatile and the pullback in August was greater than most people had anticipated, the sharp rebound last month reflects optimism on the part of homebuilders. Even with the 5 percent drop in building permits, there are signs of life in the housing market. The fact that homebuilders are starting new projects at a time when home inventories remain very high will ease concerns for the Fed particularly after a series of better than expected economic reports.   Hopefully this trend will continue with tomorrow’s, which include leading indicators, the Philly Fed survey, existing home sales and the weekly jobless claims report. 

EUR: TALK IS NOT THAT CHEAP

It was another topsy-turvy day for the euro whose price action was determined exclusively by reports and then denials by Euro area policymakers that a deal to rescue the Eurozone is in the works.   This morning, the euro soared after the Financial Times reported German Finance Minister Schaeuble told lawmakers that the EFSF could increased to EUR1 trillion.   Unfortunately shortly thereafter Schaeuble denied that the comment was made and later in the afternoon, French President Nicolas Sarkozy said Eurozone deal talks were “stuck.”   Although talk is cheap, it is not that cheap in the current market environment.   It has become abundantly clear over the past week that investors are desperate for relief from European policymakers and because of that they are latching onto any reports of progress even if it is denied because given how widespread the reports have been, they must have some teeth.   However expanding the EFSF to 1 or 2 trillion will not be easy.   We saw how long it took to boost the fund to EUR400 billion.   One way to skirt around the political, legal and financial difficulties of increasing the EFSF outright would be to lever the EFSF by guaranteeing initial losses up to 20 percent of the face value on the loans. This idea is gaining traction because it could be implemented faster and would not require a significant amount additional capital from Eurozone nations.   After accounting for the current commitments, the EFSF has about EUR 270 billion left for leverage which is just enough to cover 20 percent of the gross funding needs for Italy, Spain and Belgium.   The hope for a rescue plan has even helped investors shrug off Moody's downgrade of Spain from A1 to Aa2. Moody’s decision is not much of surprise considering that Fitch and S&P downgraded the country’s sovereign debt rating earlier this month.   Furthermore, Moody’s still rates Spain one notch higher than the other rating agencies.   Mass protests have also hit Greece ahead of the Parliament’s vote on further public sector jobs and wage cuts as well as lower pensions for high income earnings, new levies on taxpayers and bargaining rights for workers.   This bill needs to approve in order for the EU and IMF to release the next tranche aid to Greece.   German producer prices are scheduled for release tomorrow and we expect Germany to see the same increase in price pressures as the U.S. and other countries around the world.   

GBP: ALL EYES ON RETAIL SALES

The British pound traded higher against the euro and U.S. dollar.   The Bank of England released the minutes of their monetary policy meeting held on October 6 ^th .   The minutes revealed that the monetary policy committee voted 9-0 to expand quantitative easing to 75 billion GBP and considered the possibility of a 100 billion GBP program as it viewed that risks were skewed to the downside.   The committee also noted that “Overall, the case for expansion was compelling.”   UK monetary officials are clearly choosing to err on the side of caution when it comes to stimulus despite the fact that inflation in the UK economy remains at a record high.   Yet the view of the Bank of England is that price effects will decline rapidly next year as the impact of the increase of the Value Added Tax wears off.   The pound pared losses quickly as it was boosted by improving risk appetite flows and relief that the BOE did not signal any further expansion of the QE program.   Tomorrow’s retail sales figure could prove critical to the future direction of the pair especially if they surprise to the upside creating further optimism amongst investors that a combination of loose monetary policy and improving consumer demand could provide a lift for the UK economy in the year end.   Apartment prices in London’s priciest neighborhoods will rise next year as investors seek less risky assets amid political and financial instability.   Strong appetite from overseas buyers is clearly materializing.   The international dimension has led core central London locations to outperform the rest of the U.K. market and this trend should continue next year.

CAD: LEADING INDICATORS FALL 0.1 PERCENT

The Canadian, Australian, and New Zealand dollars gave up earlier gains in the greenback following the weaker than expected Beige Book report.   Canada’s leading index was little changed for the fourth month in a row, showing a decline of 0.1 percent in September.   The index was unchanged in August. The weakness in the index was concentrated in the stock market and the manufacturing sector, largely offsetting the rebound in the housing sector.   Economic data on the docket for Canada includes wholesale sales and the consumer price index.   Inflation is expected to have slowed down to 0.2 percent.   Oil is trading near its highest price in a month as U.S. crude stockpiles are increasing less rapidly than previously forecast.   Gold retreated for a third day as report on the European rescue fund curbed demand.   However, gold still maintains its status as a safe haven and could rally if this weekend’s EU summit disappoints.   Australia’s Melbourne Institute leading index increased 0.8 percent in August, following an upwardly revised increase of 0.6 percent in July.   Corporate profits and productivity have been driving the gains over the past six months.   However, it is too early to embrace the current signal from the leading index that growth will surge above trend in early 2012.   Australian retail property values and rents are expected to fall over the coming years as slumping business and weak consumer confidence weighs on demand.   Retail property values will lose 1.3 percent by September 2012, a survey by National Australia Bank found.   Consumer confidence is now seen as the biggest challenge facing property firms over the next year.   Quarterly business confidence and import price are due for release this week.   No new economic data was released from New Zealand today.   

JPY: ECONOMIC DATA SHOWS MODEST RECOVERY FROM QUAKE

The Japanese yen traded lower against the U.S. dollar, euro and British pound but gained strength against the commodity currencies.s   The Bank of Japan announced it has reached an agreement with the Bank of Korea on an increase in the maximum amount of the bilateral yen-won swap arrangement from three billion US dollars equivalent to thirty billion US dollars equivalent.   The swap arrangement is designed for non-crisis situations and will help stabilize regional financial markets through supplying short-term liquidity.   Japanese all industry activity declined for the first time since March.   The index contracted 0.5 percent in August following a 0.4 percent increase in July.   Wednesday’s Activity Index release is the latest addition to a series of mixed data suggesting that the Japanese economy continues to recovery from the March earthquake at a modest pace. On the one hand, industrial production figures released this week showed a marked slowdown from earlier stages of the recovery. This, in addition to a stubbornly strong Yen, led the Bank of Japan last week to maintain its near-zero interest rate and existing liquidity programs. At the same time, the most recent Tankan survey and machinery-order data pointed to growing optimism among manufacturers and a possible pick-up in business.   With no new economic data on the calendar this week, the yen will take its cue from external factors including news from Europe and economic releases from the United States.   Longer bond yields may dip as Japan’s Ministry of Finance signals a short-term debt focus.   Japan may increasingly rely on shorter-term debt to fund reconstruction from its record earthquake, causing longer-term yields to fall.   Japan’s primary dealers expect the government to sell notes with maturities of five years of less for the rest of this fiscal year.   The government is currently gauging demand for bonds as it compiles its third extra budget, following a 6 trillion yen ($78 billion) in measures already announced to fund recovery efforts from the March natural disasters.

EUR/GBP: Currency in Play for Next 24 Hours

Our currency pair in play for the next 24 hours is EUR/GBP.   Economic data we expect for release from the U.K. are retail sales figures for the month of September at 4:30 AM ET / 8:30 GMT.   From the Eurozone we expect consumer confidence for the month of October at 10:00 AM ET / 14:00 GMT.   Then we expect U.K. consumer confidence for the month of September at 7:01 PM ET / 23:01 GMT.

EUR/GBP has consolidated quite a bit over the past few days and is now trading range bound, which we determined using Bollinger bands.   Nearest support is at the 20-day simple moving average price of 0.8695.   Should the pair continue to slide, significant support will be found at 0.8630, where the lower first standard deviation Bollinger band lies.   To the upside, nearest resistance is at 0.8787, which is the 100-day SMA.   Should the pair breakout from there, heavy resistance will be encountered at 0.8822, where the upper second standard deviation Bollinger band lies.

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Comments (1)

FrancisTan

October 19, 2011 at 05:39 PM ET

Hi Kathy,
How effective is US - QE3 if every country (EU, UK, Swiss, Japan & etc) of major currencies has QE? What will happen with comdollars and Asian currencies especially China and Singapore? Thank you.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.