In This Issue.
* Euro takes a spill
* Economic data rundown
* Spain cuts growth outlook
* Norway defies gravity
And, Now, Today's Pfennig For Your Thoughts!
Another day for the dollar…
Good day…and welcome to the last full week of July. As Chuck mentioned on Friday, Chris and I will be running split shifts while he attends a conference in Vancouver and then followed by his summer vacation, so let’s see if the old Chuck’s away currency rally can mount a comeback at some point over the next couple of weeks. In the pre-crisis days, it was always a running joke on the trade desk that once Chuck left for vacation or any extended period, we would invariably see a rally in the currency market but times have definitely changed over the past several years.
When Chuck signed off on Friday morning, he mentioned the rally in the risk assets was treading water but the fatigue set in soon after and everything began to sink as the morning wore on. Most of the currencies were able to end the week in positive territory but the euro took a couple steps back and kept things from really taking off. Chuck did a good job of setting the stage as nothing in the data department here in the US on Friday allowed the markets to shift focus back to the euroland. The comfort zone for all of the financial markets remains a very small circle and you can bet its either the US or Europe in the driver’s seat on a daily basis.
Every so often we’ll see the bus driver that we don’t recognize, but the European concerns made the stops and took us home on Friday. It didn’t take long for the markets to make up their mind and before I had a chance to look up and see how things were progressing on Friday morning, the euro had already hit the low of the day at 1.2144. I guess it was around 9:00 when I flipped to the currency screens and saw everything in the red, including both gold and silver. I thought to myself it was going to be another one of those days so all I could do was tighten the seat belt and hope we stayed between the lines.
It actually turned out to be a mixed day, so things got a little better after lunch time. I’ll dig deeper in the currency market in a bit, but first let’s see what we have on tap for this week. It’s shaping up to be a fairly light week in the economic data department for the US, but all eyes will be focused on Friday when we get the first peek of second quarter GDP. There’s not much today, only a secondary economic activity report via the Chicago Fed National Activity Index, but we’ll see a few reports each day heading into the weekend.
The rest of the week will be dominated by June housing numbers, which kicks off tomorrow with the May home price index. This report is nearly two months old and is expected to show a slight rise, but the experts are calling for a lower figure compared to the last report. In other words, it’s looking to be a non-event. I don’t know what to think about this report. I went out to one of those home value websites and it did show the value of my house has increased, but what’s that really based on. Sure, I could ask the price it came up with, but I seriously question whether a potential buyer would actually pull the trigger when there still remains a glut of homes with depressed prices.
It’s just like anything else, in that, it’s only worth what somebody will pay for it. With consumer sentiment shaky at best, things should remain capped for quite some time. This presents a nice segue into Wednesday as we see the results of new home sales in June. The nominal sales figure is expected to hold steady, but the month over month comparison is expected to show a significant slowdown compared to May. We’re quickly approaching the end of housing’s late spring to midsummer butter zone as the school bells will be ringing all too soon. Once the kids are back in school and the leaves start to fall, the pool of potential buyers receives a significant cut.
Thursday will give us the most reports to review as the June durable goods report is expected to continue moving in the wrong direction. Pending home sales are shaping up to give us the same results as new home sales and the weekly jobs numbers should keep the Fed members on the edge of their collective seats. As I mentioned earlier, Friday should hold the cards this week as second quarter GDP is forecast to fall even further to 1.4%. I went back through some old headlines about the first quarter results and one really grabbed my attention. US economy grew 1.9% in the first quarter on consumer spending…talk about some spin.
Speaking of spending, we also get a first glance at personal consumption in the second quarter and to no surprise is expected to show further deterioration. In fact, economists are calling for over a 50% drop off in spending so it’s not shaping up to be a lollipop and gumdrop kind of week on the home front. The battle between the US and European concerns kind of reminds me of the board game Risk, in that momentum constantly shifts from one player to the other and can last for a very, very long time.
I’ve gone on way too long about that stuff, so let’s switch gears and talk about the market. As I mentioned earlier, the dollar reclaimed its spot at the head of the table and gained against every currency, except for the yen but barely. I was in the office sporadically over the weekend and pulled a chart of the dollar index while I was killing some time. Let me back up for a minute, since some of you might be new to all of this. When you hear the dollar is up or down, this usually refers to the dollar index which measures the dollar compared to a handful of currencies with a majority of the weighting toward the euro.
From a practical standpoint, the relative strength or weakness of the dollar is really referring to its relationship to the euro. With that being said, it’s no wonder why the dollar index is hovering near its one year high since the euro is trading at a two year low in the mid 1.21 handle. It’s sort of a misleading statement to say the dollar is at a one year high because not all of the currencies have gone the way of the euro, but the dollar has firmly been in the driver’s seat since mid April, with most of its rising taking place in May.
As a result of the quiet day in the US, the markets were looking for something to grasp and it didn’t take long as Spain lowered its growth outlook heading into next year. Spanish officials said they expect GDP to shrink 0.5% in 2013 instead of squeezing an ever so slight gain as previously forecast. With recession expected well in to the future, traders were in a full court press in calling for a sovereign bailout at some point down the road, so a Greece like result was paving the way as the weekend quickly approached. The direction of the euro is a testament to the market’s loss of confidence that European officials will have the ability to keep things contained for the time being.
I know Chuck just mentioned the Australian dollar, but this currency is a perfect example of the divergence among the currencies. While the euro has fallen by the hands of its own sword, the Aussie is still trading in a historically high range. It has seen its fair share of volatility over the past several months but its domestic economy and positive yield differential has been enough to keep it above parity for the most part and among the top performers so far this year.
Talk of rate cuts from the central bank will still remain its Achilles heel, so traders will probably put a lot of stock into the inflation report due out Wednesday. This report is expected to show a sharp decline for inflation, so if this does ring true, we could see the rate cut talk fire up again.
The Canadian dollar has somewhat been in the same boat as it has managed to stay in a relatively comfortable trading range around parity. The similarity continues as we saw June inflation increase less than forecast at a 1.5% annual rate compared to the market expectation of 1.7%. The thought of a rate hike has lofted in the air now and then over the past couple of months, which I haven’t put any faith into given the state of the US economy, but lower inflation pours water all over the coals of that talk. The Canadian economy has been able to hold its own in this up and down environment, so the latest rise in wholesale sales is just another feather for its cap.
Moving south of the border and one of the worst performing currencies on Friday, the Mexican peso made headlines as the central bank kept rates on hold and voiced a fair amount of concern for the potential of continued weakness in the global economy. Risk aversion appears to have gotten the best of the peso on Friday, but the less than optimistic outlook voiced from policy makers didn’t help the situation. While the peso if far from one of those core currencies, it was at least worth mentioning since inflation has been above their target and policy makers didn’t seem concerned one bit.
The rand actually came in last place on Friday by falling about 1.5% on two fronts, which includes both risk aversion and speculation of rate cuts. The central bank unexpectedly cut rates last week by 0.5% and many are expecting that trend to continue in an attempt to keep the economy afloat. Since the rand is considered to be more in the emerging market bucket than anything, interest rates are the key driver for this currency. The lack of economic stability in this country more than offsets any influence by gold in this type of economic environment.
If we take a look at the best performing currencies, or should I say the ones that managed to not lose as much, we see the Norwegian krone at the top of that list. In fact, both the krone and the Singapore dollar were within a fraction of a percent from jumping into the black but it was nice to see the krone breaking away from the gravitational pull of the euro.
The Norwegian economy is a polar opposite when compared to most of Europe so from a fundamental standpoint, it only makes sense. Speaking of fundamentals, gold and silver were able to end the day in a positive note, albeit slightly, but returns from last week clearly separates those currencies that have good to decent fundamentals from those that are on the wrong side of the tracks.
As I came in this morning, the dollar strength from Friday has carried over and has even intensified as both gold and silver have taken quite a hit this morning as they are trading down around 1%. A pickup in the European concerns is again at the center of it all as Greece and Spain continue to dominate headlines. This morning, its rising yields on Spanish debt and some tough talk from the IMF regarding the uncertain future of additional rescue funds to Greece that has the risk aversion/flight to liquidity crowd back into the streets. A very light data day in the US won’t do much to steal the spotlight today so it’s shaping up to be another day for the dollar.
Then there was this…The Associated Press surveyed more than a dozen economists, think tanks and academics, both nonpartisan and those with known liberal or conservative leanings, and found a broad consensus: The official poverty rate will rise from 15.1 percent in 2010, climbing as high as 15.7 percent. Several predicted a more modest gain, but even a 0.1 percentage point increase would put poverty at the highest level since 1965. Poverty is spreading at record levels across many groups, from underemployed workers and suburban families to the poorest poor. More discouraged workers are giving up on the job market, leaving them vulnerable as unemployment aid begins to run out.
To recap…Chuck’s clairvoyance rang true as the lack of economic data in the US on Friday gave way to a rise in European concerns. It didn’t take long for the dollar to make its mark on Friday as we saw the low of the day right out of the gate. The lower growth outlook in Spain going into next year was enough to rock the boat and drag the euro down to the mid 1.21 handle. There aren’t too many data reports this week, but we’ll see housing and durable goods for June. Friday looks to be the focal point as we have second quarter GDP and consumption results. The Australian dollar has remained fairly resilient but its latest inflation report due later in the week could throw a road block. The Norwegian krone was able to escape the euro’s gravitational pull on Friday.
Currencies today 7/23/12. American Style: A$ $1.0285, kiwi .7918, C$ .9838, euro 1.2122, sterling 1.5537, Swiss $1.0094, . European Style: rand 8.4116, krone 6.0813, SEK 6.9703, forint 237.07, zloty 3.4477, koruna 21.1014, RUB 32.5751, yen 78.17, sing 1.2585, HKD 7.7571, INR 55.95, China 6.3860, pesos 13.4775, BRL 2.0242, Dollar Index 83.69, Oil $89.10, 10-year 1.40%, Silver $26.9550, and Gold. $1,571.48. and for a look at the U.S. Debt Clock, click here.
That's it for today…I had fairly uneventful weekend that was packed with more work than usual, but I still found time to recharge the batteries. I was able to watch the smack down the Cards gave the Cubs on Saturday night, which reminded me that I haven’t made it down to Busch Stadium so far this year, and was then capped by a weekend sweep on Sunday afternoon. It looks like a return to the oppressive heat this week after a tolerable weekend here in St. Louis, so try to stay cool out there. With that said, Mondays are probably the busiest day of the week so I need to get a bunch of stuff done before the phones start ringing. Until tomorrow…Have a Great Day!!
Assistant Vice President
EverBank World Markets