Daily FX Market Roundup 03-17-14
EUR: Russia and US’ Next Moves
Dollar: Pre-FOMC Data Not a Major Threat
AUD: Unfazed by China’s Decision to Double CNY Trading Band
CAD: Supported by Rebound in Existing Home Sales
NZD: Extends Gains on Stronger Confidence
GBP: More M&A Flow
JPY: Japanese Government Sees Evidence of Rising Domestic Demand
EUR: Russia and US’ Next Moves
Based on today’s price action in the currency and equity markets, investors are happy to see that Russia has not increased its military activity in and around Ukraine. With the U.S. and European Union imposing travel and financial sanctions on key Russian and Ukrainian officials today, the ball is now in Russia’s court. The world is watching to see how Russia will respond to the new sanctions, which are limited to only 21 individuals. The euro is trading higher because these restrictions do not apply to Putin, members of his family or key economic or banking officials, but it is wishful thinking to believe that he will buckle under the pressure of these weak measures. Of course this is only the international community’s first response to Russia’s violation of Ukraine’s sovereignty and territorial integrity. If Russia fails to de-escalate the tensions like President Obama hopes, more severe sanctions imposed on a longer list of individuals are sure to follow. Russia has already threatened to retaliate and it could be a matter of hours or days before they impose their own restrictions that could include limits on business activity of major U.S. companies such as ExxonMobil, Boeing, Ford and PepsiCo.
The big question now is whether this will remain a war of words or turn into a larger military conflict between Russia and Ukraine that requires a deeper involvement by the West. We know the world does not recognize the legitimacy of the Crimea referendum and the Ukrainian government has approved an emergency measure to activate their 40k military reserves in case Russia makes a deeper incursion. If Russia’s interest is limited to Crimea and the world accepts that it has fallen under their control, then the sanctions that we have seen so far could be the worst of it. However if Russia who has argued that Kiev is not a legitimate government decides to make a deeper foray into Ukraine to “protect all Russian-speaking people,” then the world will have to decide if they will take more aggressive measures such as extending full NATO membership to Ukraine. Russia is vehemently opposed to Ukraine NATO membership – in 2008, they threatened to point nuclear missiles at Ukraine if they joined the alliance. By extending an invitation to Ukraine, NATO would be effectively telling Russia they are prepared to defend the country from further advances but this comes with its own risk of reigniting the Cold War and significantly degrading Russian-U.S., and Russian-European relations. The bottom line is that it is very difficult to be optimistic under these circumstances because of the material risk that the crisis in the Ukraine will deepen and for this reason we eye the rally today in the EUR/USD and other major currency pairs with extreme caution.
Dollar: Pre-FOMC Data Not a Major Threat
There was very little consistency in the performance of the greenback today, which should not be surprising considering that we do not expect any big moves in the dollar ahead of Wednesday’s Federal Reserve monetary policy decision. A number of U.S. economic reports were released today and a few additional releases are scheduled for tomorrow but none of these reports are significant enough to alter the central bank’s monetary policy plans. Today’s economic reports provided further evidence of a slow but steady recovery in the U.S. economy. Economists had been hoping for a larger rise in the Empire State manufacturing and NAHB housing market indices but the reports fell short of expectations. Nonetheless they improved from the previous month and when combined with the uptick in industrial and manufacturing production, provided very little threat to the U.S. dollar. As long as these reports do not show a significant deterioration in economic activity, there is very little reason for the Fed to change its pace of tapering. The same is true for Tuesday’s inflation and housing market reports. CPI is expected to remain low and housing market activity should rebound in February after falling sharply in January. The greenback traded higher against the Japanese Yen today thanks to the rebound in U.S. yields and rally in equities. Since we expect yields to continue ticking upwards ahead of the FOMC rate decision, we are also looking for a further recovery in USD/JPY. Of course, USD/JPY is very sensitive to risk appetite and the Ukraine crisis so the currency pair could completely ignore yields and head lower if the Russia decides to invade Ukraine.
AUD: Unfazed by China’s Decision to Double CNY Trading Band
The Australian, New Zealand and Canadian dollars traded sharply higher against the greenback today despite a big announcement from China over the weekend. On Saturday, China doubled its Yuan trading band. They will now allow the CNY to fluctuate 2% above or below its daily midpoint rate, up from 1%. Given the currency’s recent rapid decent, this decision was not a complete surprise and had only a limited impact on major currencies but it represents a major shift in FX policy for the central bank. The PBoC is clearly using the exchange rate as a means to increase stimulus and provide additional support to its economy as growth slows. With exports falling by the largest amount in more than 4 years during the month of February, the economy could certainly use the support of a weaker currency, which helps to make the cost of Chinese imports more competitive. Although the central bank argues that today’s move is a step towards increasing exchange rate flexibility and greater two-way volatility in the currency, in the context of falling exports the recent slide in the Yuan clearly reflects an attempt to support the economy. A weaker Yuan hurts countries like Australia and Japan who rely heavily on Chinese demand. However even though trade balances could suffer, the AUD and JPY have taken the band winding in stride. Economic from the commodity producing countries were mixed with New Zealand service activity slowing but consumer confidence rising. In Canada, existing home sales rebounded after falling sharply the previous month and international securities transactions increased, providing support to the loonie. We’ll keep an eye on Asia as no major economic reports are scheduled for release from these countries over the next 24 hours.
GBP: More M&A Flow
Compared to some of the other major currencies, there was very little movement in the British pound. UK Rightmove’s house price report was the only piece of U.K. data released today and it showed that house prices grew at a slower pace in the month of March. Do not be mistaken however the U.K. housing market remains strong. Prices in London hit a record high this month and across the nation, the 1.6% rise also left national values at all time highs. The Help to Buy scheme rolled out last year has proven to be a huge success in preventing a deep slide in housing market activity. EUR/GBP continued to trickle higher on the back of Vodafone’s deal to acquire Spanish Cable Operator ONO for $10 billion. This is Vodafone’s first major acquisition since selling its 45% stake in Verizon Wireless for $130 billion. Flush with cash, they have a now have a significant amount of capital to spend on acquisitions so we can assume that this won’t be the last sterling negative M&A flow by Vodafone this year. EUR/GBP has been trading extremely well but whether gains can be sustained will largely depend on Wednesday’s Bank of England minutes and employment report.
JPY: Japanese Government Sees Evidence of Rising Domestic Demand
A sharp improvement in risk appetite drove the Japanese Yen lower against all of the major currencies. No economic data was released from Japan overnight but the Cabinet provided its latest economic assessment. In addition to repeating last month’s view that the economy is recovering at a moderate pace, they also said “a last minute rise in demand before a consumption tax increase is intensifying.” This suggests they see evidence of increased consumer consumption, which we haven’t seen much sign of in recent economic reports. However economists are looking for a significant improvement in the trade balance on Wednesday and this may be due in part to higher domestic demand. There are several Bank of Japan officials speaking this week including Governor Kuroda but based on the latest central bank meeting, policymakers do not feel that there is any immediate need for more stimulus. In the meantime we expect USD/JPY and the other Yen crosses to take its cue from risk appetite.