Euro drop gathers speed into year-end on news of Greek elections
05/Jan/2015 • Currency Updates•
The last two weeks of the year are typically calm in currency markets, as liquidity dries up and news is scarce. Not so this year. The Euro started on the back foot as the Greek Parliament failed to elect a new President and the Government called for a General Election, with the leftist anti-austerity coalition Syriza leading the polls. Then ECB President Draghi greeted the New Year with a speech where he all but stated that quantitative easing would start as soon as the next Council meeting, on January 22nd. We had expected both developments, as well as the resulting Euro collapse that stopped just short of the psychological level of 1.20 Dollars. The Euro move dragged down all other major currencies against the greenback, which ended the year setting fresh five-year highs on a trade-weighted basis.
The main news before the data-scarce Christmas holidays was the surge in retail sales in November. These were up 1.6% MoM in real terms, possibly reflecting already the boost to real UK incomes brought about by the collapse in energy prices. News on consumer spending is generally providing a nice counterpoint to the mildly disappointing outcomes we have seen from production figures. However, what little news there was out of the UK over the holidays was not enough to move Sterling significantly against the Euro, and GBP moved almost in lockstep with the common currency losing nearly 2% against the US Dollar.
We had been pointing out for some time that the main driver for the Euro in 2015 would once again shift to politics. This position was justified in the last week of the year when the Greek Parliament failed to elect a new President and therefore new elections were called for January 25th. The anti-austerity leftist coalition Syriza is leading the polls, although its lead has narrowed recently. Syriza’s counterpart in Spain, Podemos, is also topping most polls there. While organized anti-austerity challenges to the status quo have not yet formed in either Portugal or Italy, electoral success in Greece or Spain should sooner or later impact politics there. With the Eurozone economy growing at barely perceptible levels after years of pain, and inflation set to print negative across Europe, it is clear to us that political risks are playing a greater part in Draghi’s willingness to force aggressive measures.
A New Year speech by the ECB President warned that deflationary risks are worsening, and hinted heavily that further measures, including QE, will be announced at the next Council meeting on January 22nd (as per the new schedule of meetings). The accumulation of negative news continued to take its toll on the common currency, which is now flirting with the psychological 1.20 level against the US Dollar.
The US economy continues to post strengthening growth figures, thus further widening the already large gap in performance with most of the rest of the developed world, particularly the Eurozone. Third-quarter growth was revised up to 5%, and most indicators point to further strength in consumer spending in the fourth quarter. As lower energy prices boost household real incomes in 2015, growth in the vicinity of 3-3.5% is certainly feasible over the next few quarters. With unemployment below 6% and wages, at long last, rising faster than inflation, we concur with markets expectations of a first Fed hike in the Spring of 2015 and a year-end Fed funds level of around 1%. The Dollar is reacting to this positive outlook as one might expect, posting fresh cycle highs against most major currencies on an almost weekly basis.