$ Dollar Safe Haven
€ Euro Moves Backstage
¥ ZIRP Does Nothing For The Yen
? The Pessimistic Pound
? Where is the Swiss Security?
Dollar Safe Haven
Plumes of smoke from bombed out buildings in Beirut suburbs. Gnarled wreckage of blown up trains in Haifa. Progressively more strident rhetoric from Israeli and Iranian leaders with ominous warnings about consequences of actions. As these images dominated the news last week sending oil to record highs, market players attention shifted from routine economic concerns to fears that this most recent spate of violence in the Middle East may push the world to the brink of a diplomatic crisis in the coming weeks. In turn, traders flocked to the safety and liquidity of the dollar - the sole remaining superpower on the planet. Thus, the greenback rose against all majors gaining 132 basis points on the euro.
The economic news was mixed at best with the Trade Balance deficit finally showing some signs of stabilizing as it printed 63.8 Billion versus 64.9 Billion expected. However all other data clearly signaled a slowdown in the consumer sector as Advanced Retail Sales declined 0.1% versus consensus of 0.4% gain while U of M survey also fell to 83 from 85.5 projected. Battered by better than $3/gallon prices at the pump and a flattening housing market US consumers are curbing their spending. Whether the recent pick up in wage growth can revive demand as we move into Q3 remains to be seen, but for now the slowdown show serve as warning signs to any dollar bulls betting on the fact that the Fed will go to 6% money.
Next week the US economic calendar is extraordinarily busy but the Fed namely Chairman Bernanke - will be the centerpiece of action as he testifies for the semi annual Humphrey Hawkins testimony in Congress. Traders ears will be especially attuned to any change of Fed recent hawkish tone in light of the massive escalation of geo-political tensions and the slowdown in US consumption. If the Chairman once again mentions the word pause the dollar may suffer, although the unstable political situation could make trading quite volatile.
Euro Moves Backstage
European economic data was relatively positive last week with both Services and Manufacturing PMI exceeding expectations but the unit received no boost from the numbers as markets focused on geo-political events. Furthermore, EZ GDP data, CPI reports and the decline in German exports all pointed to only a moderate pace of growth in Q2 suggesting that the ECB will have no need to hike rates twice in the month of August. With the 25bp hike already factored in and with 50bp hike looking decidedly improbable the bid in the EUR/USD softened as the week wore on and even lackluster US data could not rally the pair.
Next week offers little possibility for euro bulls as most the scheduled economic data is decidedly second tier. One release of note is the EZ CPI data which is expected to decline to 0.1% from 0.3% the month prior. If, however, the sharp rises in energy costs and the pick up of economic activity filter through the CPI numbers producing an upward surprise, speculation will start anew regarding an additional rate hike from the ECB in the month of August. Barring that, the EZ calendar shows little event risk. The end of the week brings the ZEW survey which may weigh down on the unit if it reports the sixth straight decline in a row. However, in 2006 the ZEW has been far less accurate than the much more important IFO due the week following and traders may simply ignore the reading unless it prints materially outside of expectations. In short it looks to be another week of dollar rather than euro trading with the base currency in the pair simply reflecting the sentiment of the counter part of the pair.
ZIRP Does Nothing For The Yen
In what was perhaps one of the least surprising policy moves of the year on Friday the Bank of Japan finally lifted its Zero Interest Rate Policy for the first time in six years. The BOJ raised rates from zero to 25bp but hinted that no further rate hikes may be forthcoming for the rest of the year. In the post announcement press conference Governor Fukui noted that rate adjustments will be gradual with the BOJ not planning consecutive raises. As a result USD/JPY actually rallied spiking as high at 116.15 before settling near the 115.75 level. With the market having priced in three possible hikes of 25bp by the end of 2006, last weeks news played right into the hands of yen bears who have argued that BOJ actions vis a vis the lifting of ZIRP are largely symbolic rather than substantive. In addition which the rest of the economic news for Japan was dour at best as the Eco Watcher survey slipped below the 50 boom/bust level for the first time in six months and Industrial Production contracted more than expected.
The slowdown in the economy confirms BOJs cautious approach to rates however, longer term players may want to consider two following points. First, at 115.00 or above USD/JPY presents a very favorable exchange rate for Japans massive export sector which should in turn lead to acceleration in the growth of countrys GDP in the second half of the year. Secondly, with oil prices hovering near the 80/bbl level Japan, which imports 99% of its crude demand, is likely to see significant increase in inflationary pressures, especially at the wholesale level. This combination of faster than expected growth and rapidly rising price levels is likely to pressure the BOJ to become decidedly more hawkish as we approach 2007. Thus, while the days of the USD/JPY carry trade may not yet be over, they certainly appear to be coming to an end.
Next week yen traders will look at the health of the services industry through the Tertiary activity data and will pore over the BOJ minutes coming at the end of the week. With ZIRP now officially lifted, trading in the yen will turn to speculating on how fast and by much will the rates be raised in the future.
The Pessimistic Pound
After all was said and done, Pound traders were the most complacent of the lot with the currency remaining relatively unchanged by the end of the week as negative economic data weighed on the unit. The visible trade balance unexpectedly expanded to -£6.75 billion as higher oil prices and the continued decline of competitiveness in the UK's industrial sector produced the second largest deficit on record. The deteriorating trade position of the British economy could depress the country's GDP growth going forward and will likely keep the Central Bank on the sidelines for the rest of the year. Adding fuel to the fire, PPI input, which was anticipated to hold steady, actually declined 0.2%. Any signs of slowing inflation are sure to keep the BoE dovish on their monetary policy. The employment picture looked bleak as well, with the claimant count jumping 5.9k, 900 more than anticipated.
This weeks data shouldnt cause the Pound to change course, with CPI likely to slow to 0.1%, retail sales only expected to grow 0.4%, and Q2 GDP anticipated to hold at 0.7%. What will really catch the attention of market participants, however, is the release of the minutes from the BoEs most recent monetary policy meeting. Traders will be looking for insight into the direction of the MPC, as their sole hawk, David Walton, passed in late June. Chances are, they will remain dovish as disappointing economic figures have pointed to slowing growth and should lead to further Pound declines throughout the week.
The other issue that may draw attention this week is the political uncertainty surrounding Tony Blairs Labor Party, which is under investigation for its suspicious connections to wealthy supporters. While this inquiry is unlikely to produce any immediate reshuffling of the government, confidence in British politicians may falter.
Where is the Swiss Security?
The Swiss franc saw steady declines throughout the week, managing to simultaneously reaffirm that the Swissie is no longer the first safe haven of choice, as well as convey its lack of high correlation to the original safety instrument: gold. As we mentioned above, the escalation in geopolitical conflict has caused traders to opt for the US dollar. Previously, the Swiss currency would have held this noble designation. While gold continues to remain the asset of choice in times of geopolitical stress, as evidenced by its rise over $650 this week, the Swiss franc can no longer benefit from the metals massive appreciation. At one time, the currency was 40% backed by gold, but in 2005 the Swiss government sold the nation's vast inventory and returned the funds to the country's cantons.
Given the complete lack of economic data last week, this week should serve as a true test of traders preference for US dollars or the Swiss franc during political duress. Adjusted real retail sales are due to be released on Tuesday, following Aprils rise of a whopping 12.2%, the biggest gain since Switzerland started recording the data in January 2001. Subsequent improvements for the figure should highlight the stellar consumer demand growth in the Swiss economy. On Thursday, the trade balance is likely to expand for the fourth consecutive month to a spectacular ?1.3 billion on booming export growth which has benefited from a weaker Swiss franc. Finally, producer and import prices are anticipated to declined slightly by 0.3%, which would not bode well for the Swiss franc as any signs of deflationary pressures could prevent the Swiss National Bank from continuing their quarterly rate hikes throughout the rest of 2006. Overall, Swissie bulls should have a profitable week, assuming traders will focus more on the economic merits of the country.
