DailyFX | July 12 2012 1:47 EDT
We can’t accuse the markets of always (or even often) acting rationally. Though the meeting minutes from the FOMC’s last monetary policy gathering on June 20 was heavily expected to maintain the same tone and bearing the followed the actual decision itself, market participants still found room to be surprised.
Dollar Jumps after FOMC Minutes Squash QE3 Hopes, Still No Trend
We can’t accuse the markets of always (or even often) acting rationally. Though the meeting minutes from the FOMC’s last monetary policy gathering on June 20 was heavily expected to maintain the same tone and bearing the followed the actual decision itself, market participants still found room to be surprised. For the S&P 500, we would see an immediate sell off to forge fresh, two-week lows; while the Dow Jones FXCM Dollar Index recovered lost ground to move right back to the 10,190 resistance that has kept the greenback back from a bull trend for a full month. This reaction suggests that there is still considerable speculation built into these markets for another round of stimulus from the world’s largest central bank before the end of the year. However, without a definitive rejection or approval of more stimulus in the near future, the greenback will defer back to its primary source of momentum: risk trends. And so, we look forward to Chinese GDP and 2Q US earnings.
Euro: Spain’s Rajoy Announces Growth Killing Measures
There are few holding out for a quick resolution to the Euro-area’s financial ills. Instead, those projecting a bullish outlook for the shared currency and the region’s assets are working of the expectation (hope?) that investor sentiment will stabilize or recover on a global basis. This is essentially the ‘a rising sea lifts all boats’ assumption. That is a dangerous view to take when global growth is slowing, yields are at record lows and market participants are picking apart the health of the broader financial structure once again. In the meantime, the Euro region continues to undermine its own fundamental strength. Spanish Prime Minister Rajoy Wednesday announced a budget to cut €65 billion from the nation’s shortfall over the coming two-and-a-half years through increased sales taxes, cancelling home purchase rebates and reducing jobless benefits among other efforts. The reward for potentially driving Spain deeper into recession: another year meet deficit objectives. In other news, a draft of the Memorandum of Understanding suggests individual investors in Spanish banks may be forced to take losses; and Greece announced it would not be able to meet its €3.2 billion asset sale target this year. In the upcoming session, we have Irish 1Q GDP and Greek April jobs data.
Australian Dollar Tumbles after Employment Figures Drop
Perhaps the most effective piece of event risk for rousing volatility over the past 24 hours was the Australian employment data. Heading into the release expectations were set to neutral with a consensus for no change in net payrolls. As such, the 27,000-person drop in national employment (the biggest this year) caught the market off guard. The details showed that the entire loss was from full-time positions (structurally concerning) and that the jobless rate had ticked up to 5.2 percent. What is particularly threatening about a negative, Australian labor reading is that it taps into the anti-risk, anti-yield sentiment that most threatens it. This data will no doubt further the conversation of a follow up rate cut at the next RBA meeting, but it won’t be the decisive factor. The Aussie is ready to drop, but follow through is in the hands of broad risk trends.
Japanese Yen Unfazed as BoJ Shifts Funds, Offers No New Stimulus
The second opportunity to satisfy speculators’ appetite for more stimulus passed without support for the holdout bulls. At first blush, it seemed as if the Bank of Japanhad announced an increase in its crisis fight. Indeed, they increased the size of their asset purchase fund 5 trillion yen to 45 trillion. However, when we do the accounting, the funds were pulled from the credit loan program (which was reduced by 5 trillion yen to 25 trillion). On net, the top tier central bank kept its total efforts unchanged – and thereby met expectations to the baseline scenario. Given the lack of reaction from general risk sentiment to Japanese efforts in the past and the very distinct lack of interest from the yen itself, Japanese officials may have run out of ammunition long ago to manipulate the growth / credit market / debt issues from a monetary standpoint.
British Pound Unconvinced by BoE Posen’s Suggestion Policy on Hold
With a target of 375 billion pounds for its asset purchase program, the Bank of England has enacted a dramatically smaller stimulus effort than its Fed and ECB counterparts. This comparatively restrained effort to expand the balance sheet generates relatively modest strain on the sterling against counterparts like the dollar and euro. That said, there are positives to easing – like encouraging economic expansion and preventing the spread of crisis from troubled neighbors. Fundamental pound traders have to weigh the negative influence of stimulus (on the money supply and benchmark rates) against its ability to stem the tide of crisis as it spreads outwards from the Euro Zone. With that in mind, we find the 10-year Gilt yield at 1.565 – threatening to drop below the record low set in June and BoE dove Posen saying “enough” has been done for now.
Canadian Dollar Looking More and More Like a Safe Haven
What is the hallmark of an ideal safe haven? At the extremes, an ideal safe haven will have exceptional liquidity – and at the furthest reaches of panic, no currency can compete with the dollar. However, short of a financial meltdown; investors prize the exact qualities that one would expect: the backing of a strong economy (relative to its largest counterparts); a low risk of financial crisis; and even a competitive yield amongst its fellow safe havens. The Canadian dollar is one the few currencies that can check off all of those boxes. Though it has a lower yield than the Australian dollar, its economic and financial health is not at risk via connections to China. And, where its status as a safe haven is certainly lower than the US dollar, it enjoys the trade benefits and a notable return advantage. This is a great safe haven candidate…but will the market treat it as such?
Gold Floats Higher Wednesday as Baseline Fed Offers Few Surprises
After the broad sell off for gold Tuesday (against all of the major currencies) the precious metal made an unconvincing effort to recover lost ground this past session. Futures volume on COMEX trade continues to flag, the CBOE’s VIX measure for commodity is hovering near two-month lows and the average daily range is clearly decelerating. This curbed activity level doesn’t deviate very far from the wait-and-see bearing for the broader capital markets, but the activity gauge on the metal was even more reserved this past session. Despite the build in swell in speculative interest surrounding the Fed minutes this past session, gold traders tend to be absolute realists when it comes to stimulus expectations. Given the low probability that the central bank would alter its position on additional stimulus, there were no surprises.
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Next 24 Hours
Business NZ Performance of Manufacturing Index
3 of the past 12 month in contraction.
Food Prices (MoM)
1.6% year over year inflation.
Bank of Japan Rate Decision
ANZ Consumer Confidence (MoM)
Back down to May 2011 levels.
ANZ Consumer Confidence Index
Consumer Inflation Expectation
Expatiation plays a large role in future inflation.
Unemployment has been steadily declining since September 2011.
Full Time Employment Change
Part Time Employment Change
German Wholesale Price Index (MoM)
Preliminary CPI printed a read of 1.8% inflation.
German Wholesale Price Index (YoY)
Euro-Zone Industrial Production s.a. (MoM)
Declining since may 2010, last month revised lower.
Euro-Zone Industrial Production w.d.a. (YoY)
New Housing Price Index (YoY)
Continuing to increase from the 2010 dip.
New Housing Price Index (MoM)
Import Price Index (MoM)
Decline in Oil Price may help to bring down input prices.
Import Price Index (YoY)
Initial Jobless Claims
June Employment was flat.
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ECB Publishes July Monthly Report
Monthly Budget Statement
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