USD: Understanding Potential Impact Of House Vote

Posted by: Kiara Eva / On: July 28, 2011 / No Comments »

Based upon the price action in the foreign exchange market, everyone who wants to sell dollars ahead of the debt ceiling votes has already done so. The U.S. dollar remains weak but did not lose much more in terms of value over the past 24 hours.  For the most part, the markets are in wait and see mode as everything will depend on the House vote scheduled for 6pm ET this evening. The vote will be on House Speaker Boehner’s bill and if his legislation survives the vote in the House (which will be a close one) it will move to the Senate.  If the House rejects Boehner’s bill, it could lead to a slight sell-off in the U.S. dollar and if they approve the bill, it should lift the dollar. However the greenback’s reaction to the House vote in general should be minimal because even if it is approved by the Senate, it will be amended by Senate Majority Leader Reid who will then go back to the House for another vote early next week. If Boehner’s bill is rejected outright by the House or Senate, then the focus will turn to Reid’s proposal which would have to be revised to make its way through Congress. In other words, there is very little chance that a bill will be passed by the House and Senate before the weekend. What this means is that on Friday, we could see some additional weakness in the U.S. dollar as investors unwind positions ahead of a busy weekend in Washington.

Second quarter GDP numbers are scheduled for release tomorrow along with the Chicago PMI report and the final University of Michigan Consumer Sentiment survey for the month of July. We expect economic data to continue to take a back seat to the U.S. debt talks. Second quarter growth is expected to slow from an annualized pace of 1.9 to 1.8 percent. Consumer spending and trade activity weakened between April and June which confirms that growth the economy lost momentum in the second quarter. As for manufacturing activity in the Chicago region, a rebound is expected given the improvements seen in NY, Philadelphia and Dallas. Jobless claims fell to 398k from an upwardly revised 422k the previous week which is extremely promising for the labor market.   Continuing claims also dropped to 3.703 million from an upwardly revised 3.72 million. These numbers point to a strong rebound in non-farm payrolls but claims have done a poor job of forecasting NFPs so we are only cautiously optimistic. At bare minimum however, today’s jobless claims figures tell us that the labor market has not worsened but after 2 months of abysmally weak non-farm payrolls, we need to see more than one week of claims below 400k to have any faith in the number. Pending home sales rose beat expectations, rising 2.4 percent in the month of June but the housing market in general remains weak.

EUR: PRESSURED BY WEAKER DATA AND CONTAGION FEARS

For the second day in a row, the euro lost value against the U.S. dollar. Amongst the high beta currencies, the EUR/USD has performed the worst over the past 48 hours. While the Australian and New Zealand dollars are holding near record levels, the euro slipped approximately 200 pips in 2 days. Weaker economic data out of Europe and rising CDS spreads has spelled big trouble for the single currency.  The number of people filing for unemployment claims in Germany declined less than expected – although we consider the 11k drop still very good, the euro came under heavy selling after the confidence numbers showed a sharp deterioration in sentiment.  Businesses are concerned about the volatility in the financial markets, the European sovereign debt crisis and the recent rate hike by the European Central bank certainly doesn’t help. A weak bond auction in Italy drove Italian CDS spreads back towards its record which means that even after the EU’s second bailout plan for Greece, investors still believe that the odds of Italy defaulting on its debt is near its highest level ever. Part of the concern could be driven by rumors that Economy Minister Tremonti will be resigning but the rumor has been unsubstantiated.  Investors are remembering that Europe’s sovereign debt troubles have not gone away even though the U.S. debt problems are front and center. With that in mind however, should the U.S. credit rating be downgraded, knee jerk panic selling of U.S. dollars could still lift the euro. In the meantime, the Swiss Franc rose to another record high against the U.S. dollar before rebounding.&nbsp USD/CHF held near its lows for the past 3 trading days and the outcome of the debt ceiling discussions in the U.S. will determine whether this is a pause or bottom. German retail sales and French consumer spending numbers are scheduled for release tomorrow. Spending is expected to have rebounded in both countries last month after contracting in May.

GBP: SHRUGS OFF WEAKNESS IN MANUFACTURING

The British pound held steady against the U.S. dollar but strengthened against the euro despite weaker economic data. The fact that investors completely ignored the soft CBI Distributive Trades survey shows that economic data is not their top priority. Instead, the pound outperformed simply because it is the ugliest of the 3 most liquid currencies. Both the Eurozone and the U.S. are up to their neck in sovereign debt concerns and in that light, sterling has benefitted. However the U.K. economy is not without its own problems.   The CBI Distributive survey, which measures manufacturing activity was weak to begin with and in July it fell even further from -2 to -5. The sales balance fell from -19 to -33, which is a strong sign of weakness in the manufacturing sector. This past week’s GDP report showed the economy expanding by only 0.2 percent in the second quarter. Growth has been very weak, keeping the possibility of more stimulus on the minds of policymakers. U.K. consumer confidence numbers are scheduled for release this evening and a further deterioration in sentiment is likely. According to a recent poll by Moody’s the chance of the BoE initiating another round of Quantitative Easing is now 1 in 4 instead of 1 in 5. Either way the U.K. economic outlook is not pretty but in a world where the least ugly duckling wins, the British pound is considered a beauty. 

CAD: GDP ON TAP

After an impressive run that took the Australian and New Zealand dollars to a record high and the Canadian dollar to a 3 year high, the commodity currencies held steady as lawmakers continued to hash it out in Washington. Based upon the rebound in U.S. equities, risk appetite appears to have improved but currencies are telling a very different story. Investors are still nervous and are looking at the comm. dollars and gold for safety. The New Zealand dollar did not press higher after last night’s RBNZ rate decision but once the uncertainty in the U.S. is lifted we could see renewed demand in the kiwi. At the end of the day, the Reserve Bank of New Zealand plans to raise interest rates before the end of the year, which is something few central banks are considering and for this reason, we expect the NZD/USD to remain bid. There were no economic reports from Australia and Canada today but this evening private sector credit numbers are expected from Australia. Canada will release its latest GDP numbers on Friday and even though trade activity has improved, consumer spending was mixed with retail sales less autos growing at a much stronger pace than overall retail sales. The commodity producing countries do not share the same excessive debt levels and political hurdles as the U.S. and Europe which is why they have become such attractive harbingers for safety.  At the same time, the underlying economies of these countries are also faring much better than many other countries.

JPY: LIFTED BY RISK AVERSION AND STRONGER DATA

The Japanese yen strengthened across the board today. With the US debt crisis dominating the headlines, the Yen is still being looked at as safe haven currency. While large retailers’ sales came in worse than expected, the year-over-year retail trade printed at 1.1 percent versus -0.5 percent eyed. This better than forecast data showed the economy is rebounding back from the nuclear crisis in March. The major boost came from electronic sector as consumers bought televisions ahead of the switch to digital broadcasting. In addition, the lack of power capacity in Japan also helped sales of energy-efficient products. As a result, economists warned that these one-off factors may soon fade and growth would slow again. Nonetheless, the supply-chain disruption caused by the March earthquake is being restored quicker than expected as the production picks up in the worst-hit regions.  Consumer sentiment rises with output in Japanese factories returning to normal and people tend to open their wallets when they feel more secure about their jobs. Meanwhile, major exporters are urging the Bank of Japan to intervene to curb the recent strength in the yen. Despite the yen reaching four-month high, the Japanese Economics Minister Kaoru Yosano said that the government is unlikely to intervene before the debt ceiling deadline in the US. Thus, the market could see more volatility in yen versus the majors as the deadline of August 2 nd approaches. Looking ahead, a positive household spending data tonight would likely confirm the momentum of Japanese recovery. Furthermore, we also expect JMMA manufacturing PMI, jobless rate, and CPI data from Japan.

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be our currency pair in play for the next 24 hours. German Retail numbers are due at 2:00AM ET/ 6:00 GMT followed by U.S. Q2 GDP at 8:30AM ET/ 12:30 GMT and the Chicago PMI report at 10:00AM ET/ 14:00 GMT.

With the Italian bond yield surging close to 6 percent, the contagion effect pushed EUR/USD further into the range trading zone, which we determined using Bollinger Bands. The pair’s decline should bounce off the today’s low at 1.4253. Otherwise, the lower first Bollinger Band should provide further support at 1.4148. On the flip side, should EUR/USD reverse its trend, the first level of resistance is at 1.4520, the 61.8% Fibonacci level. Once broken through, the upper second Bollinger Band should contain pair’s rally at 1.4600.

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