Global equities rally as US dollar trades in tight range
04/Apr/2011 • Currency Updates•
Markets last week were able to shrug off the generalized downgrade of expectations for economic growth in 2011. These were brought about not only by the Japanese earthquake, but also by the softening economic numbers in the US, particularly consumption, and the recent spike in oil prices. The dollar traded in a tight range against most currencies to end the week slightly down, while sterling recovered some of its losses from the previous week.
Last week’s data brought further confirmation of the slowdown in UK growth, highlighting the dilemma that the Bank of England faces. On one hand, inflation is running considerably above target; further, the spike in oil and commodity prices makes it likely that it will continue to do so for many months. On the other hand, the economy is slowing down fast, and has yet to regain the level of output prior to the crisis. Thus, GDP growth for the last quarter was revised only slightly upwards to a negative 2.0% saar. The business sentiment for manufacturing came down at a lower than expected (though still healthy) 57.1. Sterling traded for the most part unaffected by this news. It is clear that for now the main driver will be monetary policy, particularly the timing of hikes by the BoE. Sterling ended the week up 0.5% against the euro and about 1% against the US dollar.
Peripheral stress continued last week as Portuguese and Irish bond yields broke to new all-time highs. Contrary to expectations, no news emerged regarding a liquidity facility aimed mostly at troubled Irish banks, which are increasingly dependent on the ECB for cash. Notably, Spanish bonds held up better, and commentators rushed to posit that sovereign bond yields in the Eurozone are increasingly becoming three-, rather than two-tiered, with Spain, Italy and Belgium performing as a group increasingly separately from Portugal, Greece and Ireland. We remain sceptical, as we believe that projections for Spanish growth in 2011 and 2012 are too high.
Last week saw another slew of conflicting messages, both from Federal Reserve officials and from the macroeconomic data. As to the former, hawkish noises earlier in the week by Plosser and Kocherlakotta were effectively contradicted by Dudley on Friday. Dudley, who is generally considered to be closer to the views of the Chairman Bernanke, reiterated his view that unemployment is unacceptably high and indicated that he is in no hurry to normalize monetary policy. As to macroeconomic news, weak housing and consumer confidence numbers conflicted, with still strong business sentiment numbers and continued improvement in the labour market, as unemployment dropped again to 8.8%. The dollar reacted to this, confusing information as one would expect, trading trendless in a tight range to end the week nearly unchanged in trade-weighted terms.