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FX: Gear up for ECB, BoE, Retail Sales

Last updated 1/11/2012 5:19 PM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• FX: GEAR UP FOR ECB, BOE, RETAIL SALES
• EUR: NO BACK TO BACK RATE CUTS FROM ECB
• GBP: NO POLICY CHANGES EXPECTED FROM BOE
• AUD: JOB VACANCIES DECLINE
• NZD: EXTENDS GAINS TO FRESH 2 MONTH HIGH
• CAD: POSITIVE COMMENTS FROM FLAHERTY
• JPY: SHIRAKAWA EXPLAINS YEN STRENGTH

EXPECTATIONS FOR UPCOMING FED MEETINGS

FX: GEAR UP FOR ECB, BOE, RETAIL SALES

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With two central bank rate decisions and the U.S. retail sales report scheduled for release on Thursday, investors should brace for a busy trading day.  It has been quiet for most of the week particularly in USD/JPY, but with U.S. consumer spending numbers scheduled for release, a bit more volatility may be unavoidable. The latest non-farm payrolls report show stronger job growth in the U.S. economy, but that only matters so far as how it can impact consumer spending which is why the retail sales report is so important. Interestingly enough, despite the improvement in the labor market, consumer spending is expected to rise only 0.3 percent, which is an extremely modest gain especially since the International Council of Shopping Centers reported a 4.5 percent annualized rise in store sales. The holiday shopping season was a strong one, thanks in large part to heavy discounting and longer hours – according to a spokesman for ICSC, “the last few weeks of December helped to lift full-month performance above our earlier expectation.” However a similar report on chain store sales from Johnson Redbook showed a 2.1 percent decline in spending in the first five weeks of December from November, which is of course at odds with the rosier results seen in the ICSC report and explains why there is both upside and downside risk to tomorrow’s report. 

According to the Federal Reserve’s Beige Book report, the U.S. economy grew at a modest to moderate rate at the end of 2011 thanks to stronger holiday sales, manufacturing, farming and mining activity. Price pressures and hiring remain limited but the improvements were enough for the 12 Fed districts to sound relatively optimistic. In fact, Fed President Plosser, who is not a voting member of the FOMC this year said the improvements may even require a rate hike before mid-2013.  Of course we have to take this with a grain of salt because 2013 is a long time from now and Plosser is the most hawkish member of the FOMC.  Evans who is the most dovish member of the FOMC and also a nonvoter wants the central bank to be more aggressive and ease further. The ones who matter the most however are Lacker and Lockhart because they have a vote in the FOMC this year. Lacker sees serious headwinds for the U.S. economy and he expects tougher times ahead. Lockhart straddled the fence by saying that he is avoiding any rigid position on easing. Yet regardless of how tomorrow’s U.S. data fares investors are still convinced that Treasuries are one of the safest assets in the world. U.S. 10 year Treasuries were sold at the lowest level ever in a sign that investors are still aggressively buying bonds backed by the U.S. government. 

EUR: NO BACK TO BACK RATE CUTS FROM ECB

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The euro finally resumed its downtrend against the U.S. dollar - we have been skeptical of the EUR/USD's recovery since the beginning of the week and the latest price action in the currency pair indicates that even though short euro positions are at the highest level ever, investors continue to sell euros. German Chancellor Merkel met with Italian Prime Minister Mario Monti this morning and the main takeaway from their meeting was Merkel's comment that Germany could pay more capital into the European Stability Mechanism (ESM) to "send message to markets." She also announced plans to hold a meeting in Rome with Monti and Sarkozy on Jan 20 - just ahead of the Jan 30 summit meeting (which has now been postponed). Her increased commitment to stabilizing the region should have lent support to the euro and did temporarily but its overall weakness was just too overwhelming. This morning's weaker GDP report from Germany certainly did not help - the economy grew by only 3 percent in 2011 compared to growth of 3.7 percent in 2010, raising concerns that the economy could have contracted in Q4. Such weak growth numbers won't make life easy for the European Central Bank who has a monetary policy meeting tomorrow.  Having just lowered interest rates in December to 1 percent, the central bank is not expected to ease again, particularly since last month's rate cut came with a new program that makes it easier for cash strapped banks borrow. The ECB will want to give the economy time to absorb the latest round of easing before pumping more money into the economy. With some signs of improvement locally as well as globally, the ECB isn't under any pressure to act quickly. The string of positive economic reports in the U.S. will ease some of their concerns while the recent weakness of the EUR/USD does some of the work for the central bank by helping to stimulate the economy. Since the last monetary policy meeting, the unemployment rate in Germany declined and business confidence improved thanks to faster service and manufacturing activity. However there are still many areas of concern including consumer spending which fell 0.9 percent in November and investor confidence which plummeted in December. Yet even though the ECB will most likely forgo additional easing on Thursday, Mario Draghi will probably leave the door open for more stimulus, with the possibility of cutting rates by another 25bp in the first quarter if the slowdown gains momentum. The central bank is also under pressure to support Italy which means that any cautionary comments will hurt the euro. Aside from the ECB meeting, final CPI numbers are also due from Germany along with French current account and Eurozone industrial production figures.

GBP: NO POLICY CHANGES EXPECTED FROM BOE

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On the heels of disappointing economic data, the British pound weakened against the U.S. dollar and euro. For the Bank of England who also has a monetary policy announcement on Thursday, the latest numbers create a headache that could grow in the coming months. According to the British Retail Consortium, shop price growth slowed to 1.7 from 2.0 percent in the month of December, confirming that spending has been fueled by sharp discounting. Yesterday, the BRC reported a significant increase in retail sales, but unfortunately lower prices is one of the few ways retailers have been able to attract buyers into their stores. As a measure of inflation, the slowdown in shop price growth also validates the central bank’s claims that inflation will fall significantly in 2012. The U.K.’s trade balance also widened significantly in November from GBP7.87 billion to GBP8.64 billion. Softer growth in Europe led to a sharp decline in export activity that was led by weaker demand for consumer goods and silver. As part of the European Union, the U.K. is extremely sensitive to growth in neighboring countries. If the Eurozone is hit by troubles, there is no question that it will make its way to the U.K. which explains why the Bank of England will maintain a strong easing bias. Unfortunately we will hear very little about this on Thursday because the central bank is expected to keep policy unchanged and when they do, no major comments are made. Nonetheless, based on the general sentiment within the central bank, we know that they are still thinking about boosting asset purchases, a notion that will probably make its appearance in the minutes. Before the BoE meeting, industrial production numbers are scheduled released and it is forecasted to show a decline in manufacturing activity for the second month in a row. 

AUD: JOB VACANCIES DECLINE

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With the volatility in U.S. equities today, it is not a surprise to see the commodity currencies struggle, but it is a surprise that the losses have been limited which suggests that risk on, risk off has not been the main factor behind the comm. dollar’s rise. Instead, there appears to be fundamental demand for the higher yielding currencies, particularly the New Zealand dollar which ended the day unchanged against the greenback. The AUD and CAD on the other hand fell slightly and their lack of significant changes mirrors the movements in commodity prices. Australia was the only country with to release any economic data and according to the report, job vacancies fell 3.3 percent in November. The Australian economy is feeling the headwinds of slower global growth and based upon interest rate futures, the Reserve Bank of Australia is expected to respond with lower rates this year. Canadian Finance Minister Flaherty spoke again this morning and he sounded relatively optimistic when he said that there are good signs of moderate growth in the Canadian economy. Canada also happens to be the only commodity producing country with any economic data on Thursday. The new housing price index is scheduled for release and price growth is expected to have declined in the month of November.  

JPY: SHIRAKAWA EXPLAINS YEN STRENGTH

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Once again, USD/JPY has been trapped in an obscenely tight range, leaving the Japanese Yen crosses enjoying all the attention.  GBP/JPY weakened the most on the heels of weaker U.K. data while NZD/JPY performed the best, rising slightly thanks to an overall demand for the New Zealand dollar.  Japan’s index of leading indicators rose slightly in November from 92.0 to 92.9 but the coincident index fell from 91.4 to 90.3, which indicates that the economy has lost momentum. This of course is not much of a surprise considering that the export sector is suffering greatly from the strong Yen and this dynamic is expected to be confirmed by this evening’s trade numbers. The country’s current account surplus is expected to shrink while the trade surplus is expected to slip deeper into negative territory. The strong currency has long been one of Japan’s greatest troubles and unfortunately one that is not expected to be resolved soon. Aside from the trade figures, the Eco Watchers Survey will also be released. This report measures the sentiment on the street and unfortunately the only thing that can buck the downtrend is the holiday season. 

EUR/USD: Currency in Play for Next 24 Hours

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The EUR/USD will be our currency pair in play for next 24 hours. Eurozone industrial production numbers will be released at 5:00AM ET / 10:00 GMT followed by the ECB Rate Announcement at 7:45AM ET / 12:45 GMT. ECB President Draghi will deliver a press conference at 8:30 AM ET / 13:30 GMT. From the U.S., the retail sales report is scheduled for release at 8:30 AM ET / 13:30 GMT.

The EUR/USD remains in a downtrend according to our Double Bollinger Bands. Support is at today’s low of 1.2665, followed by the psychologically significant 1.25 level. Resistance of the other and is at 1.2825, the first standard deviation Bollinger Band followed by 1.3055, the 61.8% Fibonacci retracement of the 2010 low to 2011 high rally. 

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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.