Mixed worldwide news bring desultory trading in financial markets

Tom Tong03/Dec/2012Currency Updates

It was another uneventful week in financial markets, including currency. Better economic news out of Asia contrasted with somewhat weaker US data and the usual litany of gloom from the eurozone. Risk assets turned in marginally positive performances, as equities rose, commodities were flat, and spreads tightened slightly.

Major currencies traded in some of the tightest ranges in the year, and most of them ended the week essentially flat. We think that it is generally best to take advantage of these quiet interludes in the market to cover currency risks.

GBP

Markets were abuzz with the news that current Bank of Canada Governor Mark Carney will be named to replace Mervyn King as Bank of England Governor. We welcome the announcement, as Mr. Carney has a proven track record of success steering the Canadian financial system through the crisis; he is also a fresh, innovative thinker unlikely to rely on the group-think that hobbles other Central banks around the world.

However, the appointment does not take place till July, so we do not expect any short- or medium-term impact on sterling. Of more immediate importance was the news that 3Q GDP was unrevised at 1% growth QoQ saar, mostly on the back of Olympics-driven consumer demand and business investment. Seeing through the effects of the bank holiday and the Olympics, the British economy is likely to continue its trend towards stagnation or slight contraction.

Neither Mr. Carney’s announcement nor the unexciting macroeconomic news seem to have any impact on sterling, which, like most major currencies, spent the week in a very tight range to finish roughly where it started against both the euro and the US dollar.

EUR

There was no let up in the gloomy macroeconomic releases out of the eurozone last week.

Euro-wide unemployment hit yet another record, at 11.7%. While peripheral countries (other than Ireland) continue to destroy employment at a dizzying pace, the German jobs machine has ground to a halt, as reduced external demand for German exports hits German firms. Headline inflation dropped to 2.2%; however, the internal details are more worrisome. Spanish and Italian inflation continue to outpace German inflation.

This means that internal devaluation in the periphery is stalling, and therefore all the economic pain is for naught. We therefore see no reason to change our bearish forecasts in the euro, and expect the common currency to retest its 2011 lows in the first quarter of next year.

USD

Last week brought a mixed batch of data out of the United States. Sticking to those that were not affected by Hurricane Sandy, new orders for capital goods surprised to the upside, rebounding 1.7% in October, and indicating that business investment may have got to a better start than expected in the last quarter of 2012. On the negative side, GDP growth for the third quarter was revised upwards, but solely on the strength of inventory building, which we expect to be given back in the fourth quarter; real domestic demand was revised down.

On the political front, there were no significant news on the negotiations to avoid the “fiscal cliff”. However, enough Republicans have made conciliatory noises that we expect an agreement to be reached before the end of January at the latest, and probably before that.

The somewhat better tone we are seeing in the labour market leads us to maintain our expectations of 2% growth for 2012, and actually raise them slightly to 2.5% for next year.

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Written by Tom Tong

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