Positive economic news spur dollar rally

Tom Tong13/May/2013Currency Updates

Better than expected economic numbers continued to drip out of the United States last week. As traders price out the possibility of a serious economic slowdown in the US, Treasury yields are picking up, and markets are bringing forward the timing for a Fed exit from extraordinary measures. Unsurprisingly these developments are providing support for the broad based dollar rally we have been forecasting. Over the past week, the greenback gained 1% against the Euro, 1.4% against Sterling, and 2.5% against the Yen. The Japanese currency continues to sell off sharply in response to the Bank of Japan’s resolve to inflate the country out of the deflationary spiral it has been stuck in for the better part of two decades.

GBP

Last week was very light in terms of macroeconomic newsflow from the UK. The only report of note was a slightly better than expected industrial production figure for the month of March, but this is by now nearly two months old. All eyes are now on the Bank of England. As widely expected, it let both rates and the size of the balance sheet unchanged on Thursday, and as is customary in such cases, it published no communique We will have to wait three weeks for the minutes to see if the 6′ to vote in favor of keeping policy steady has changed.

EUR

As in the K, there were not a lot of market-moving economic news out of Europe last week. There are some gleams of hope, however, in the apparent political shift against austerity. Several countries are asking for more time to reach medium-term deficit targets, and the European Commission appears to be taking a relatively soft line on such requests. This should not be mistaken as a fiscal loosening, however. It is simply an acknowledgement that such fiscal targets were utterly unrealistic and that austerity policies have only succeeded in bringing down fiscal revenues even faster than spending has been cut. Therefore, no actual expansion of public demand is being planned. Nevertheless, the mere acknowledgement of economic reality implicit in such delays is a welcome development. We will wait, however, for more vigorous steps before revising our bearish euro forecasts.

USD

It was a week of light economic news in the US as well. However, the most valuable high-frequency indicator of the state of the US economy, weekly jobless claims, continues to surprise pleasantly. They fell for the third consecutive week, hitting again a new low for the current economic cycle. This is a volatile indicator, but together with the strong April jobs report and the generally better tone of economic news worldwide, it makes us more confident that our forecast of 2.5-3.5% growth for the full year of 2013 will be borne out, and that the Fed will be the first major central bank to start pulling back on extraordinary easing measures. Our bullish forecast for the US dollar therefore remains unchanged.

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Written by Tom Tong

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