Equities and emerging markets bounce back as dollar, Sterling and Euro move in tight ranges
09/Sep/2013 • Currency Updates•
Emerging market currencies and equity markets staged a comeback last week. Those currencies that had been punished the worst over the summer sell off (ZAR, INR, IDR) staged a partial comeback, though it is not yet clear whether this is a technical bounce or a longer term rally. With regards to the G10, we saw weaker data almost simultaneously out of Germany and the US. The EUR/USD rate, which has been moving mostly in reaction to relative macroeconomic performance in the two areas, ended the week nearly unchanged, while Sterling rallied against both on the back of continued positive surprises in the UK.
The UK economy continues to surprise pleasantly to the upside. The critical PMI business surveys all rose to new cycle highs; manufacturing at 57.2, services at 60.5 and construction at 59.1 are all consistent with above-trend growth. Further, the strength appears to be coming primarily from domestic demand. The data is making it increasingly hard for the Bank of England to issue more explicit guidance about the divergence between market interest rate levels and its own projections for the end of QE and the beginning of hikes. This makes the ILO labour and unemployment data out next week take additional importance, as the BOE has explicitly linked its forward rate policy to further drops in the unemployment rate. The streak of strong data buoyed Sterling against both the Euro and the dollar by nearly 1% to end the week flirting with the May highs against the common currency.
Weaker data out of the eurozone dampened down market enthusiasm over its emergence from the longest recession in its history. German retail sales, industrial production and exports all disappointed in July, and they are all three showing annualized declines in the mid-single digits so far in the third quarter. Less followed by markets, but perhaps more critical, the labour market in Spain and Italy shows few signs of stabilization. Spanish payrolls shrank again August by 14,000, with the three-month moving average turned down to a -26,000. We do not yet have Italian August numbers, but July also saw a decline. We think job market stabilization in these two countries is a necessary condition before the all-clear can be sounded in the European crisis, and we are rather far from that. The Euro managed to end the week unchanged against the dollar, as weaker labour news across the Atlantic balanced out bad news out of Germany in investors’ view.
As always during the first week of the month, markets were focused on Friday’s payroll report for August. number came out somewhat below expectations, but the details were very weak. July number was revised down significantly. Even though unemployment dropped to 7.3% from 7.4%,this was due entirely to a drop in the percentage of the population in the labour force, which fell to the lowest since 1978. Not the kind of data that is likely to cheer the Federal reserve, which like the Bank of England has explicitly linked future policy to further improvement in the labour market. While other data (exports, PMI surveys) were more positive, it will be quite difficult for the Federal Reserve to achieve consensus in the September meeting for a significant change in policy. Consequently, we are changing our call for the taper from this month meeting to the following FOMC meeting, at the end of October. We will be revising our G10 FX forecasts accordingly, pushing our short-term forecasts for the dollar slightly down.