- CB rate divergence on solid footing
- EUR flirts with five-year lows
- GBP stumbles on weaker manufacturing
- Euro periphery spreads hit post-EMU lows
Two-days into 2015 and the Capital Market theme remains the same, the mighty dollar is starting the New Year on firm footing. The dollar index (90.70) is flirting again with a new nine-year high on the back of Central Bank interest rate divergence. The Fed is expected to hike rates in 2015 while the market is anticipating that the ECB will initiate sovereign debt buying as early as this month. A BoE rate hike this year remains a “coin toss,” while the BoJ continues to combat its low inflation issues. The IMF released its currency report that clearly shows that the U.S. dollar as the reserve currency of choice. Allocations to the USD are the only one to increase whilst the EUR is “progressively out of favor” with allocations fallings -8% quarter-over-quarter.
U.S consumer remains confident
Economic data over the past month reinforces the market view that the U.S economy continues to strengthen (GDP running at +2.7% and is anticipated to strengthen over the coming quarters). A stronger U.S is required to help the Fed when it finally comes to hiking interest rates (presently, the fixed income market is pricing in a H1 Fed hike). As per usual, their biggest influencer is always the U.S consumer. Data this week revealed the state of the consumers’ confidence in their own economy. The current confidence index has rallied to a new two-month high (December 92.6 vs. 91.0, m/m).
Also supporting the dollar’s strength is the continued bearish sentiment expressed by the ECB’s Draghi. On Friday, he reinforced that Euro interest rates are expected to remain “lower” for a considerable period of time. He noted that the risk of deflation in eurozone could not be ruled out, as the risk of ECB failing its mandate was higher than six-months ago. Naturally, bearish comments like this are renewing pressure on their 19-member single unit (Lithuania officially became the newest member on New-Years day), the EUR (€1.2015).
Euro Manufacturing disappoints
Not helping the ECB’s cause are the numerous misses in European PMI manufacturing data on Friday morning. The Eurozone’s December manufacturing PMI was revised lower to 50.6 from 50.8. Slightly higher than the previous month (November 50.1), but low enough to convince the market that the region ended last year on a soft note. France remains weak, while Europe’s backbone Germany continues in positive territory (51.2).
Nevertheless, market empathy remains the same. Draghi’s remarks will support investors’ expectations that an ECB sovereign bond buying program is expected to begin sooner rather than later. This is upping demand for bunds and periphery debt and is forcing Euro periphery spreads to print new post-EMU lows. The market is looking at January 22 to mark the ECB’s next decisive move – a combination of government bond and corporate bond purchases to maintain the ECB’s willingness to expand its balance sheet. This is reason enough for the EUR bear to remain comfortable being short the ‘single’ unit and willing enough to add to those positions on most EUR rallies.
The EUR is within touching distance of breaking the psychological €1.20 handle. Through here, market consensus believes that the currency will be capable of accelerating its losses outright towards €1.10 and parity – levels last visited a dozen-years ago.
The EUR is not alone. Across the English Channel, sterling is also on ‘softer’ ground. The pound is trading close to its 18-month low outright (£1.5396) after its own December manufacturing PMI likewise disappointed (52.5 vs. 53.9, m/m). The weaker headline print, coupled with recent weaker data, suggests that the U.K economy is slowing. New manufacturing orders have slowed and are mostly being propped up by domestic demand. From an international trade perspective, the export numbers are nothing to write home about. On the U.K job front, employment is rising and so too is personal debt levels. At next week’s BoE’s scheduled rate announcement, the market will be waiting to see what the Governor has to say since policy makers are in no rush to hike rates any time soon.
On Tap for Next Week
Capital Markets jump straight back into the deep end with a busy agenda for the first official workweek of the New Year.
Germany gets to kick start the week with its monthly preliminary CPI report on Monday. On Wednesday, the eurozone releases its flash CPI y/y estimate, while the Aussie’s (Tuesday), China, Canada and U.S deliver their trade balances. Central Banks again will dominate most of the proceedings with the FOMC meeting minutes mid-week, and the BoE rate announcement on Thursday.
The remainder of the week is to be dominated by North American employment numbers. There is Wednesday’s ADP non-farm employment change and Thursday’s U.S unemployment claims. Friday should be the pick of the week with Canada’s employment change and the U.S’s granddaddy of economic indicators – Non-Farm Payrolls.
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