FX: Most Important Dates In July

Posted by: Kiara Eva / On: June 30, 2011 / No Comments »

Earlier this week, we talked about how the foreign exchange market dodged a bullet when Greece voted “Yes” to more austerity. The sheer relief of investors can be seen in the price action of the euro which rose from a low of 1.4100 on Monday to a high of 1.4550 on Friday. The broad based decline in safe haven currencies also shows that investors are more willing to take on risk, which is another sign of optimism. Over the past week, the Swiss Franc depreciated against all the major currencies which is remarkable considering that it started the week at a record high against the euro and U.S. dollar.  Aside from strengthening against the Franc, the U.S. dollar also lost value against all of the major currencies which is good news because a lot of money flowed into the Franc and the dollar during the height of the European Sovereign debt crisis. Although the Eurozone still has many challenges to overcome before putting the debt crisis behind them, the developments this past week eased many concerns. The dog days of summer are approaching but don’t expect the heat to slow anyone down because July will be a busy month.

Key Dates in July

The following dates are the ones to watch for July:

July 2 – Eurogroup leaders will be meeting to discuss the next aid payment for Greece and a second rescue package. The original meeting for Sunday was canceled and replaced with a phone conference on Saturday. So far it seems that the Germans and the French have successfully convinced their banks to rollover most of their debt into Greek bonds with longer maturities and the hope is that private investors will follow suit. The next challenge will be to get feedback from rating agencies and we expect these agencies to share their views relatively quickly.

July 7 th – The ECB is expected to raise interest from 1.25 to 1.50 percent on July 7 th . This would be only the second time the central bank has raised interest rates in 3 years.  They are also the only major central bank raising rates at this time. Aside from the rate decision, Trichet’s comments about future monetary policy will also have a big impact on the euro.

July 11-12 – EU Finance Ministers meet again to talk about Greece

July 15 – European Bank stress test results will be released on this day (most likely after the market closes) and up to 15 banks of the 91 banks being tested could fail the tests according to inside reports from Reuters. The reaction in the market will depend upon whether the failures are concentrated in one country or many and the size of the bank. Regulators want to release the results after the global markets close to avoid volatility. Since July 15 th is a Friday, the hope is that investors will have the weekend to digest the report. The last stress test results were released on July 23 rd of last year and when the results were first released, there was some initial volatility as investors struggled with interpreting the announcements. The Committee of European Banking Supervisors was also late in publishing their summary, causing additional uncertainty in the financial markets. By the end of the day however, currencies recovered all of its initial losses. In 2010, the results of the stress tests were neither a buzz kill nor a euphoric event for the financial markets and perhaps that is the best reaction that regulators could have hoped for. Only 7 banks failed the 2010 stress tests.

July 16 – EU central bankers meet again and in all likelihood, the discussions will center around the stress test results.

Next week’s price action could largely hinge upon the outcome of this Saturday’s EU Finance Ministers conference call and on the ECB meeting on Thursday. There are also a few pieces of Eurozone economic data on the calendar worth watching. This includes Eurozone PPI, final service sector PMI numbers, EZ retail sales, German factory orders, industrial production and trade numbers.

USD: WILL IT BE A QUIET JULY 4 HOLIDAY?

Quantitative Easing has officially come to an end which means the Federal Reserve will no longer be pumping additional money into the financial system to keep it supported. Instead, they will maintain the current level of stimulus and hope that it will be enough to keep the economy going. The question of whether more stimulus is needed to jumpstart the economy will return next week with the release of non-farm payrolls. If you recall, last month’s non-farm payrolls report was extremely weak with only 54k jobs created in May, less than a quarter of the job growth reported in April. If this abysmal performance in the labor market is repeated in June, there will be many people screaming for more help from the Federal Reserve and talk of QE3 will be resurrected. Unfortunately job growth is expected to remain weak with only 83k jobs forecasted for the month of June. Such weak data would remind investors about the sluggish pace of recovery in the U.S. economy and the prolong need for easy monetary policy.   Although we believe that the U.S. economy will gain momentum towards the end of the year (we have already seen a rise in manufacturing ISM) in the short run, the prospect of a rate hike from the ECB and soft labor market data from the U.S. could keep the EUR/USD well supported.

We also cannot forget to mention that Monday is Independence Day in the U.S. which means that U.S. stock and bond markets are closed for trading – the FX market will be open as usual. Typically when the markets are closed in observation of July 4 th , we tend to see a significant decline in volatility which means trading grinds to a halt. As shown in the charts below, both the daily trading range of the EUR/USD and USD/JPY on the July 4 th holiday is extremely low compared to the currency pair’s 5 year average daily trading range. However we could see more volatility than usual on this July 4 th holiday because EU Finance Ministers are meeting to discuss Greece on July 3 rd . Headlines out of the country could trigger a reaction in the EUR/USD but even if that occurs, any volatility in the currency should settle by the time London markets are closed at 12pm NY Time or 16:00 GMT.

 

GBP: MORE GAINS FOR EURGBP?

Like the European Central Bank, the Bank of England has a monetary policy announcement next week. The only difference is that no changes are expected from the BoE while the ECB is expected to raise rates by 25bp. EUR/GBP rallied significantly in the month of June but the prospect of a rate hike by the ECB could drive EUR/GBP to yet another fresh one year high in the coming week. Economic data from the U.K. and comments from policymakers all point to the same thing – which is the need for easy monetary policy.  The latest PMI number illustrates the continued troubles in the U.K. economy. Manufacturing activity slowed for the fifth consecutive month with the PMI index slipping to its lowest level since September 2009. In the past 4 months, the index has fallen 10 points. Weaker domestic activity and sluggish demand for new export orders weighed heavily on manufacturing activity. Thankfully new orders and output increased which helped to offset some negative sentiment. Next week’s service sector PMI, construction sector PMI, industrial production and producer price reports will be more market moving than the rate decision because we won’t learn about how the central bank feels until the minutes from the meeting are released a few weeks from now. However in all likelihood, central bank officials will remain dovish with lively discussions about additional stimulus. Retail sales and consumer confidence remains very weak and unless there are material improvements in service or manufacturing sector activity, there’s nothing for policymakers to be optimistic about. The market now expects the BoE to raise interest rates in the second quarter of next year which is a significant shift from January when a rate hike was expected this month. The price action in EUR/GBP certainly reflects this adjustment in expectations. Unfortunately many economists expect demand to continue to contract due to weak income growth in the third quarter, which could add more pressure on the pound.

CAD: CANADIANS GROW LESS OPTIMISTIC

The Canadian and Australian dollar strengthened against the greenback while the New Zealand dollar held steady. The improvement in risk appetite continues to benefit high yielding currencies. Australia’s manufacturing sector gained momentum in June on the back of improved performance across the textiles, construction materials, basic metals and chemicals, petroleum and coal sub-sectors. The PMI index rose 5.2 points to 52.9 to rise back above the 50 boom/bust level. The index posted its first expansion since February carried by new orders and production. Yet, sales of new homes declined by 0.2 percent in May as demand dropped. Leading indicators of new home construction are weak across the board and the housing market remains weak in much of the country this year. Key factors to blame are the summer’s weather disasters and last November’s rise in interest rates. The key focus next week will be the RBA’s rate decision, employment numbers, and retails sales release. Expectations are that policy makers will leave the cash rate unchanged at 4.75 percent, the highest in the developed world. It should be a busy week for Australia because in addition to the RBA meeting, service and construction sector PMI numbers are scheduled for release along with retail sales and employment.  New Zealand economic calendar was quiet today with no releases. The kiwi retreated earlier as China’s purchasing managers’ index fell to the lowest level since February 2009. Slowing manufacturing growth in China and the U.S., the world’s biggest energy users, bolstered speculation fuel demand may falter and caused oil to decline, trimming the biggest weekly gain in almost three months. Falling oil prices will put downward pressure of Canada’s exports, but we forecast prices to rebound as economic conditions recover in the second half. Canada’s building permits are due for release Monday. Last month’s reading plummeted 21.1 percent after two months of solid gains and the market expects a -2.3 percent reading for April. The IVEY PMI index and Canadian employment numbers are also scheduled for release next week.

JPY: SHARP DECLINE IN TANKAN

The Japanese Yen weakened against all of the major currencies with the exception of the Swiss franc. Despite the pullback, the recent strength of the yen along with the uncertainty surrounding the global economy is still a threat to profit margins of leading exporters. Japanese Finance Minister Yoshihiko Noda warned that the currency rates and electricity disruption caused by the March earthquake may drive companies abroad. The current level of the yen is significantly higher than the expectation of the major corporations as indicated in the Tankan survey. Furthermore, the survey also showed a drastic drop in business conditions in Q2 prompted by the March tremor and nuclear crisis. Although the large manufacturing index slumped to -9 in June from 6 in March, the survey reflected optimism of an uptick in operating condition in Q3. However, the mid-sized and small manufacturers are not as optimistic as the large enterprises reporting -12 and -21 in June, respectively. Meanwhile, the unemployment rate surprised the market by declining. With people giving up on looking for work and the exclusion of the hardest-hit northeastern Japan, the improvement in labor market might not be as encouraging as the data suggested. Furthermore, as the power shortage looming in the hard-hit areas and families’ cut-back on spending, the Japanese domestic economy could continue to struggle. Looking ahead, while the European Finance Ministers will be hammering out details of the Greek bailout package, the direction of the yen would largely hinge on slew of the US data. As the market expects core machinery orders, trade balance, and eco watch index from Japan, the Bank of Japan as suggested by Noda will take decisive steps against disorderly moves and excessive fluctuations again, although the decision would not be based on certain levels.

EUR/USD: Currency in Play for Next 24 Hours

The EUR/USD will be our currency pair in play for Monday. A spokesman for the Eurogroup says the 17 Eurozone finance ministers have canceled a planned meeting on Sunday and will instead discuss new aid for Greece in a phone conference Saturday evening. Economic data scheduled for release from the Eurozone on Monday includes the Sentix investor confidence report at 4:30 AM ET / 8:30 GMT and the producer price index at 5:00 AM ET / 9:00 GMT.

Increased risk appetite continued to be the dominant theme today, as the Greek crisis was pushed from the headlines. Disappointing PMI data from across the G10 countries kept a lid on any rally capping EUR/USD gains at 1.4550 as our colleague Boris Schlossberg pointed out this morning. First support is found at 1.4400, the convergence of the 50- and 20-day simple moving averages.   If the pair tumbles, second support will be found at 1.4260, the level of the lower first standard deviation Bollinger band. On the upside, the first point of resistance will be encountered at 1.4696, June 7 th ’s high. Should the pair rally past that, heavy resistance will be found at May 4 th ’s record high since 2009 of 1.4939.

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