Trendless trading in FX markets continues, as currencies move in ever tighter ranges
02/Apr/2012 • Currency Updates•
Those waiting for quarter-end fireworks in financial markets were disappointed last week. Equities and credit took a breather from their relentless rise over the past few weeks. Only commodities markets showed some volatility, generally moving downwards. More negative news from Euro area PMI business surveys had little impact on the Euro, which managed to end the week up somewhat against the dollar while losing an roughly equal amount against Sterling, which put in the best performance of the major currencies, in spite of the downward revision to last quarter growth.
As we pointed out above, the main news out of the UK was a downward revision to UK GDP growth in the last quarter of 2011. This provides further confirmation of the delicate state of the British economy, but does lower the bar for the first quarter of 2012. We now expect the British economy to show 0% growth in this quarter. While this will allow it to avoid the technical definition of a recession, this performance, the moderate tightening of credit in the Bank of England surevey, and the lack of any prospects for acceleration in coming quarters lead us to expect another 50 billion pound round of quantitative easing from the Bank of England in May.
News out of the Eurozone was sparse last week. Second-tier economic sentiment indices largely confirmed the message from the PMI’s release, consistent with a recession that is widening from the periphery to the core. Loan data from the ECB confirmed what everyone already knew about peripheral bond markets: massive purchases of Spanish and Italian banks have avoided disaster in their respective government bond markets. However, the focus of investor worries has shifted squarely from Italy to Spain. In spite of the above-described purchases, Spanish-German spreads are creeping back up, Spanish 10-year yields are back above 5.5%, and the disastrous economic news coming out of the Iberian peninsula make it impossible to meet even the upwardly-revised deficit target for 2012. For now, none of this matters to the Euro, which spent the week flopping around in the tightest range seen in months and managed to eke out a small rise against the dollar.
Also a slow news week in the United States. Data generally painted a picture of strong consumer spending, although real income growth has been somewhat tepid. For now, there is little risk to our view of trendlike economic growth in the 2 to 3% range for 2012, but as always Friday’s labor market report will be critical. Another month of 200,000+ net job creation would provide strong confirmation for our positive view of the US economy.