Currencies continue to trade in a narrow range while asset markets bounce back from their early August crash
30/Aug/2011 • Currency Updates•
Financial markets remained unsettled last week. Although equities and commodities ended the week up nicely from their August lows, volatility remains extraordinarily high in most markets, with the conspicuous exception of most G10 currencies which trade in surprisingly narrow ranges. To the risk of EMU disintegration we now add the spreading fears of a double dip recession in the US and Europe means that equity and commodity markets react violently not just to headlines from European policy makers, but to every significant macroeconomic datum that is released. Amid this gloom, this week’s rally in asset prices despite the absence of clear positive surprises offers some hope that technical resistance levels have been reached. Meanwhile, most currency markets remain very calm by comparison, with the conspicuous exception of the Swiss Franc. The US dollar rose slightly this week, and it appears to be forming a long-term bottom in trade weighted terms.
Last week developments in the UK were consistent with continued weakness in domestic demand and increased worries from the Bank of England. The CBI retail survey confirmed that household demand continues to contract. More importantly, formerly hawkish MPC member Weale indicated in a speech that he is ready to consider further quantitative easing should the economy weaken further. This major dovish shift opened the door to further Sterling weakness. In a week of relatively subdued FX movements, GBP sold off rather sharply, dropping 1.5% against the Euro and 0.7% against the dollar.
Last week was dominated by dismal news on Eurozone business and consumer confidence. Euro are consumer confidence experienced its largest one month drop since 1985, and the German IFO index of investors’ expectations saw the second largest drop since 1991. These surveys indicate that the sharp deceleration in European GDP growth in the second quarter is unlikely to be reversed in the third, and the main question now is whether the Eurozone will experience an outright double dip recession in the coming quarters. Given this dismal news, the resilience of the common currency remains nothing short of astounding. The continued willingness of the ECB to step into the breach and buy Italian and Spanish sovereign debt is no doubt the main factor holding the Euro up, and last week it managed to rally nearly one percent against the greenback.
Macroeconomic news flow turned somewhat less negative in the US last week. The main release of the week, orders for durable goods, showed a sizeable rebound in July and a small upwards revision to the June number. Optimism, however, was tempered by the volatile nature of this number, and also by the fact that the modest rebound has left it nowhere near breaking the level it attained late last year, let alone the distant levels of 2007. The other event focusing investors’ attention last week was the long-awaited Fed Chairman speech at Jacksonhole, Wyoming. Markets were somewhat disappointed, as Ben Bernanke did not announce any new measures. Instead he reminded markets that the most effective policies to deal with the current situation are fiscal, not monetary. Given the dismal state of leadership in Washington, there is little chance of any economic leadership from that front. The dollar lost the minor gains it had made during the week in the hours of trading following this disappointing speech, and ended the week slightly down in trade weighted terms.