Dollar soars on skepticism about solution to European crisis
19/Dec/2011 • Currency Updates•
Last week saw the US dollar index rise nearly 2%. Equities worldwide dropped, but the trend we highlighted last week continues. US markets dropped less than most, and European shares performed particularly badly. The Spanish and Italian curves steepened massively. It is interesting that the enormous gap between the still-high Euro level and peripheral debt stress continues to correct, as the common currency plunged against most other major currencies while Spain and Italy successfully auctioned off debt and short-term peripheral yields fell very sharply. We caution that momentum indicators and very stretched positioning among traders, who are very short the Euro, could provide some short-term support to that currency. We would seriously consider paring back exposure to a Euro rally as we get closer to light Christmas markets.
Data out last week was consistent with our expectations for a mild recession in the UK. The LFS household survey revealed that the public sector continued to lose jobs in the third quarter, a massive 4.4% drop in saar terms. Private sector jobs were flat. Unsurprisingly, contractionary policies are, well, contractionary, and the doctrine of expansion through austerity is no less absurd in the UK than it is in Europe. However, unlike Europe the UK is not saddled with a dogmatic central bank nor with dysfunctional fiscal structures, and we continue to expect Sterling to outperform the common currency while underperforming the greenback.
Our long standing bearish view on the Euro has been amply vindicated over the past few weeks. Again, the Euro dropped sharply and breached on several occasions the psychological 1.30 barrier. While we remain as bearish as ever on the Euro currency experiment, we now think that there are some sources of support for the common currency over the short term. Consensus has turned sharply bearish on EUR, as it always does after a prolonged move downwards; the CFTC commitment of traders report shows speculators holding record short Euro positions, and this is a useful indicator when it is this extreme; the ECB has apparently given a green light for peripheral banks to buy huge amounts of their Government debt and finance it with ECB facilities, which means that the string of successful debt auctions is likely to continue. As we approach year-end, position squaring is likely to dominate markets and in the absence of headline shockers, it may be difficult for the Euro to continue its drop. We therefore turn temporarily neutral on Euro, while maintaining a negative view over the longer term
Mixed macroeconomic news out of the United States, but overall the positive tone of the last few weeks was confirmed last week. Retail sales and industrial productioncame in a little weaker than expected, but these are very volatile on a monthly basis. Importantly, weekly jobless claims, the most meaningful weekly indicator of the US cyclical picture, continued their healthy fall, and the 4-week average is now solidly below 400,000. Both of the available regional manufacturing surveys posted solid gains, which leads us to discount the negative industrial production data as a one-off. The relatively small exposure of the US economy to Europe, its political system aversion to austerity, and the sanity prevailing at the Federal Reserve will be three positive factors supporting the modest US recovery in the future, and we remain long-term bullish on the dollar.