Currencies trade in tight ranges all week, but dollar rallies after strong US labour report
12/Mar/2012 • Currency Updates•
Risk assets worldwide ended the week flat to slightly lower, holding to the relatively tight ranges we have seen over the past couple of weeks. Currencies were no different. Most major currency pairs held to within 1% of their starting points through the week. The absence of dramatic news out of Europe helps explain this relative calm. The European crisis is transitioning into a more chronic, longer term phase, where bad economic news drives the news cycle.
The only trend of note happened late in Friday, where the rather good payroll report out of the US brought about a general rally in the dollar. This clear positive correlation between US economic outperformance and US dollar strength has been a key development in FX markets over the past few weeks.
Sterling had a tough go of it last week. The pound traded down against most major currencies, weakened by a spate of weaker than expected economic reports. The PMI services sentiment index dipped to 53.8 from 56, which puts the composite PMI index back down to 53.6 in February. Although this level would be consistent with a slight expansion in output, negative surprises in January construction and industrial production lead us to maintain our forecast for flat to slightly negative growth over this quarter and the next, and therefore continue to expect a further expansion of quantitative easing when the current planned purchases are completed.
Macroeconomic news out of the euro zone last week continued the pattern of the past few weeks: disappointing in core Europe, terrible in the periphery. German industrial production rebounded less than expected in January for the terrible December reading, and it is now showing 0% growth relative to fourth-quarter levels. French industrial production was flattish as well. However, Italian IP plunged 2.5%. Retail sales showed a similar pattern. Overall they were up just 0.3%, but still down 0.8% saar from the 4Q average. Spanish retail sales, however, plunged over 6% in real terms from last year levels. Spanish data is particularly concerning, and bond markets are starting to pick up on it. Spanish bond yields are now higher than Italy’s, which we believe is more consistent with the relative sustainability of the two countries’ public and private debt burdens. Overall, the Euro seemed to mostly ignore the data, and traded listlessly until the very positive US payroll data drove it down to end the week flirting with the 1.31 level.
The highlight of the week was Friday jobs report for the month of February. The headline was a net creation of 227,000 jobs, and there were came upward revisions of 61,000 to the previous two months. Before waxing too optimistic, it is well to remember that this is a great number only in the context of the miserable recovery from the trough of the Great Recession. If this were a typical recovery, the monthly average should be about 340,000. Modest as they are, however, the good news are a sharp contrast to the disaster across the Atlantic. Significantly, the dollar continues to rally against European currencies whenever further evidence of US economic outperformance emerges. We retain our medium-term bullish view of the Greenback, and expect to update our forecasts early next week.