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Euro Flat, Japanese Retail Sales Down and is Capitalism Doomed?

This is a review for the forex trading week ending Friday, May 30th 2014. In this article we’ll look at the coming ECB decision, we’ll talk about why Japanese Retail Sales are going down and lastly we’ll go over BOE Governor Carney’s latest diatribe against a system he helped create.

Euro Flat, ECB Decision Awaited

The EUR/USD traded almost flat in the past 7 days. The single currency opened on Sunday at 1.3621 and closed on Friday at 1.3633, just 12 pips higher. On Monday, Mario Draghi, the President of the European Central Bank, warned that the ECB must be alert to negative price spirals in the Eurozone. Draghi conceded that there was a risk of deflation in the currency area under certain scenarios. 1) So what are these scenarios according to the President? Draghi told reporters that the Bank needs to be particularly for the potential for a negative spiral between low inflation, falling inflation expectations and credit, in particular in ‘’stressed countries’’, as he put it. ‘’In this situation, there is a risk that disinflationary expectations take hold’’ Draghi said and added that ‘’this may then cause households and firms to defer expenditure in a classic deflationary cycle’’.

However, the ECB President also added that currently there is no debate among members of the Governing Council about how to bump inflation to the 2% target and said that assets purchases could be used if low inflation were to last for a ‘’too-prolonged period of time’’. Having the person in charge of the ECB brush of the possibility for action unless low inflation persists, the EUR/USD ended Monday in the green, rallying 23 pips. Most of the gains came post-Draghi and the coming Asian session prolonged the moveup to a high of 1.3667.

What Will the ECB do on Thursday?

The FT speculates that the ECB could move to implement negative rates as soon as this week. The article cites unnamed sources at the ECB, according to which the Bundesbank President Jens Weidmann is planning to support a proposal that would aim to ease constraints on smaller businesses in more troubled parts of the currency bloc. 2) Weidmann is considered the most hawkish member of the ECB Governing Council. The Financial Times speculates that the Central Bank may announce a fixed-rate offer of cheap central bank funds, in other words a new LTRO program. 3) Under the LTRO, banks could borrow as much as they wanted from the central bank in the form of loans with maturities ‘’of a number of years.’’ This term means that the duration of the program will likely be + 3 years. It remains to be seen if the FT sources will be proven correct. The current median forecasts are calling for a cut in interest rates of 15 basis points, from 0.25 to 0.10%, at Thursday’s ECB meeting. So no negative rates like the FT speculates.

This is also the view of Goldman Sachs. The investment firm expects the European Central Bank to cut rates to 0.15 percent and an ‘’announcement of targeted credit easing measures, probably in the form of a vLTRO. We do not, however, expect any signal that the Governing Council is pondering in earnest a large-scale asset purchase program’’. 4)

European Data Flashing Red

The European data last week didn’t exactly inspire hope for the currency bloc. Wednesday was especially bad with everything from French Consumer Spending, German jobs to Euro wide Money Supply going down. Europe’s largest economy gained 24,000 new unemployed, a reduction of 15,000 was expected by market participants. 5) The rise was the increase in joblessness in six months. The adjusted jobless rate remained unchanged at 6.7 percent. Five minutes after the report, the reeling Euro was hit with another whammy when the M3 Money Supply unexpectedly declined from 1 to 0.8 percent. A gain of 0.2% to 1.2% was expected. While private loans marginally beat the -2.1% forecast (a loss of -1.8% was reported), lending is still in decline in the Eurozone.

In some positive news for the bloc, Italy managed to get a good deal at its 10 year Bond Auction. Rates fell to 3.01 percent, compared to 3.22% at the previous auction. Friday was another sea of red for the data. German Retail Sales fell 0.9 percent, a gain of 0.4 percent was anticipated by forecasters. 6) While April sales increased 3.4% in real terms and 4.0% in nominal terms compared with the corresponding month of the previous year, when adjusted for calendar and seasonal variations the real figures are 0.9% smaller than what was reported in March 2014. The common currency managed to brush off the negative news and closed Friday 33 pips in the green at 1.3633. Most of the gains came on the back of worse US data, but more on this below.

Dollar Gains in First Half of the Week, Loses in Second

The US Dollar had an interesting five trading days. The World’s reserve currency gained ground in the first half of the week, only to see the gains evaporate toward the close of trading on Friday. Against the Euro, the Greenback advanced 41 pips to a hit a low of 1.3585 in the EUR/USD early on Thursday. The last two days saw the pair reserve course with the Euro eventually closing at 1.3633. The same pattern was repeated against the Aussie. First, a move down of 23 pips pushed the AUD/USD to a low of 1.9210. Then, a rebound propelled prices higher and the Australian Dollar closed at 0.9308, up 75 pips.

Durable Goods Gain, US GDP Falls

On Tuesday the US Durable Goods Orders for the month of April unexpectedly gained 0.8 percent. A loss of 0.5 percent was expected by analysts. The previous month’s orders were revised higher from 2.6% to 2.9%. At the same time, the Core Durable Goods Orders (excluding transportation items), dipped 0.1% to 0.1%. Two hours later, the US Consumer Confidence figures published by the Conference Board gained from 81.7% to 83%. 7) The data still came in short of the 83.2% market forecast.

On Thursday, the preliminary numbers for the first quarter US GDP showed that the world’s largest economy shrunk for the first time since 2011. The data came in worse then the most pessimistic forecasts, clocking in a loss of 1 percent. The median market estimates were centered around a negative 0.6 percent. 8) The good news, according to economists, is that much of the loss is the result of less inventory building that can’t last. This lead some forecasters to up their second-quarter growth forecasts. The market seems to agree with this view as the important news event had little effect on the price. The EUR/USD was seen trading back at its pre-release price of 1.3616 few hours after the report.

Friday saw the Chicago Purchasing Managers Index unexpectedly gain to 65.5, a fall from previous month’s 63 figure was forecasted. Few minutes later the revised numbers for the University of Michigan Consumer Sentiment gained 0.1 to 81.9, below the 82.9 market estimate.

Australian Capital Expenditures Fall 4.2%

It was a slow news week for the Australian currency. Only 3 notable news reports were released in the last 5 days. On Tuesday, the Construction Work Done figures released by the Australian Bureau of Statistics showed a gain of 0.3 percent for the first quarter. The median forecast was centered around a loss of 0.3 percent. The Construction Word Done measures the change in the total inflation adjusted value of completed construction projects. The big ticket item was Wednesday’s Private Capital Expenditure. Figures showed that new capital expenditures made by private businesses fell a whooping 4.2 percent in the first quarter. 9) The expectations were for a much smaller loss of 1.6%. The result initially pushed the Aussie down 18 pips to a weekly low of 0.9210. However, just two minutes later the currency pair was back up and by the close of trading on Thursday it had gained close to 100 pips at 0.9305.

Swiss GDP up 0.5%, Little Effect on the Franc

Another slow news week for the Swissy. Tuesday’s Trade Balance came in spot on the 2.43 Billion estimate. The data for March was revised lower from 2.05 Billion to 2 Billion. The Swiss employment growth continued for another quarter. Data showed that the total number of employed people during the previous quarter rose slightly to 4.19 Million. The figure came short of the 4.21 Million market forecast. The first quarter Swiss GDP gained 0.5%. This is a higher rate of growth compared to Q4 2013 when a smaller 0.2 percent was seen. The effect on the Swissy for the data miss was hardly noticeable. The EUR/CHF fell less then 2 pips in the 15 minutes after the report. On Friday, the Economic Barometer published by the KOF Economic Research Agency fell from last month’s 101.81 to 99.79. The forecast for this month was 102.05.

Japanese Retail Sales Disappoint as Sales Tax Bites

The Yen gained 15 pips against the US Dollar this week. After opening at 101.91, the USD/JPY proceeded to rally to a weekly high of 102.13. The reversal later in the week saw the currency pair fall to 101.42. This is the same Strong Dollar / Weak Dollar pattern we’ve seen in the other majors this week. The USD/JPY closed on Friday at 101.76.

The Japanese Retail Sales for the month of April came in worse then the expected -3.2% for a fall of -4.4%. 10) On a month to month basis, sales crashed 13.7 percent in April from March. This is the most in 14 years after the first sales tax increase in 1997 cratered spending. Analysts forecasted a 11.7 percent decline. Consumers and businesses frontloaded demand in March ahead of the rise when sales gained a massive 11 percent. Thursday didn’t go any better for the island nation. Household Spending for the month of April declined 4.6 percent versus a forecast of -3.4%. These numbers were also hugely impacted by the sales tax increase, in pre-tax March spending rose by 7.2%.

In some good news for the Bank of Japan (but bad news for consumers), inflation is up! The National Core CPI for the month of April rose to 3.2 percent, a figure of 3.1% was anticipated by market participants. The more current, May numbers for the Tokyo Core CPI are signalling a slight rise in price gains from 2.7% to 2.8%, although this is lower then the forecasted 2.9%. Japan’s Unemployment Rate, also released on Thursday, showed no change at 3.6 percent. The rate has been ‘’stuck’’ at this level for the past three months.

Carney Says Capitalism Doomed if Ethics Vanish

The Governor of the Bank of England used his speech at the ‘’Conference on Inclusive Capitalism’’ in London to deliver scathing review of today’s economic system. 11) All ideologies are prone to extremes, Carney told the crowd. According to the Governor, Capitalism loses its sense of moderation when the belief in the power of the market enters the realm of faith. He is of the opinion that in the decades prior to the crisis such radicalism came to dominate economic ideas and became a pattern of social behaviour. Carney added that the big banks had operated in a heads I win tails you lose bubble.

Apparently the Governor is oblivious to what was the party which created that arrangement (and no it wasn’t ‘’Capitalism’’). The previous Governor of the Bank of Canada not only didn’t object to the bailouts but said that all the bailout and stimulus activity is working. Signs of growth in Canada and elsewhere are almost entirely driven by public policy, Carney said back when he was at the helm of the BOC. 12) Shifting the blame for the transfer of wealth from taxpayers to large banks is par for the course for public officials.

In the small bit in the speech that was devoted to public policy, Carney said that the very loose monetary policy in the UK had helped to prevent a lost generation of longterm unemployed and has improved longterm social mobility prospects. The BOE Governor added that the new powers and responsibility handed to the Bank should help to reduce future incidence of financial crises. So there you have it. Another massive transfer of wealth after the bailout, this time from the nation’s savers is being explained away as helping the unemployed. So how do near zero rates and the printing of money for the purpose of buying up UK gilts help the unemployed? I don’t know, you should ask the Governor that question.

UK Mortgage Approvals Down

Sterling lost 81 pips last week. The pair opened at 1.6833, then rallied to a high of 1.6881 before crossing the breakeven line and reversing to close at a loss. The GBP/USD proved to be the only major USD cross that was unable to reverse the fortunes in the second half of the week. The pair didn’t significantly recover in the last days of the week despite a general weakness in the greenback.

The UK Mortgage Approvals printed in the red on Tuesday. The number of new mortgages approved during the previous month fell from 45,000 to 42,200. Analysts expected a small gain in the rate of growth to 45,200. 13) The report published by the British Bankers Association showed that Gross mortgage lending increased to £12.2 billion in April from £11 billion in March. That’s the highest level since August 2008 and is also a massive 52% increase from a year earlier. The only major news item on Wednesday, the Confederation of British Industry’s Realized Sales printed lower to 16. 14)The previous month the number stood at 30 and was expected to go up to 36 by market forecasters. On Thursday, GfK’s Consumer Confidence popped up to 0 from the previous -3 figure. The report didn’t make an impact on the Pound as this is a minor news item.

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