Risk assets, dollar shrug off Hurricane Sandy to rally moderately

Tom Tong05/Nov/2012Currency Updates

Although headlines this week were dominated by the impact of hurricane Sandy in the New York metropolitan area, financial markets were rather cavalier in their assessment of the disaster’s longer term impact. Equities and the dollar rose moderately, while respecting their recent ranges. Volatilities across asset markets continue to come down, as investors are apparently unconcerned with the upcoming US elections or the barrage of critical decisions from the world’s key central banks. We disagree with this sanguine outlook, and would use this lull in the markets to hedge currency risks before volatility returns to FX markets.

GBP

Confidence indicators in both the business sector (manufacturing PMI) and the consumer sector (Gfk index) failed to improve in October. This means that the gap between these leading indicators and more upbeat GDP numbers released the previous week has yet to close. However, looking through the calendar and Olympic effects on GDP, we see a similar story: the economy is stagnating at best. Therefore, we still expect (contra consensus) an increase in the Gilt purchase target at the Bank of England meeting this week. Sterling spent the week in a holding pattern, rising marginally against the Euro while trading essentially flat against the dollar.

EUR

Another week, another set of depressing macroeconomic statistics out of the Eurozone. Unemployment rose by 146,000, to a new record of 11.6%, not including Greece. Second-tier data were no less gloomy, as EC economic sentiment and capacity utilization in manufacturing both declined. Finally, the EC lending survey provided further confirmation that the easing on financial conditions engineered by ECB activism since July has failed to filter through to lending, as a net 15% of banks tightened their lending standards to corporations. It is notable that the euro has failed to rally against the greenback since the latest expansion of QE announced by the Fed.

USD

Hurricane Sandy stole the spotlight from the payroll report this week. The storm disrupted economic activity and market operations throughout the New York City area, and closed down the stock exchange for two days. However, investors largely looked past the effects of the flooding, and took some comfort on the better-than-expected payrolls report. The latter continued to paint a picture of steady though unspectacular growth, driven largely by US domestic demand. Investors send the dollar moderately higher in the week against most major currencies, and we agree with their assessment.

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Written by Tom Tong

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