Inconclusive debt ceiling resolution leads to continued USD sell-off amid threat of downgrades

Tom Tong18/Oct/2013Currency Updates

GBP

The pound rocketed against the dollar yesterday with the take off coupled from outstanding U.K retail sales and a brief interlude in the ongoing U.S fiscal policy standoff. Trading against the euro was relatively flat as resistance levels continue to play out and the pair plays around trading bands.

The carousel of positive data out of the U.K was further cemented by strong retail sales yesterday. Retail sales jumped 0.6%. This is a considerable jump from 2.2% this time last year. More importantly these are the highest levels since recession swept the nation in 2008. A rise of 0.4% was called so once again the U.K has beaten economists expectations. Record house prices combined with historically low mortgage rates, furthermore the overwhelming sense of economic recovery has also fueled spending. Consumer demand is incredibly resilient and buoyant. Consumer confidence is anticipated to further increase. Perversely, wages have only risen 1%, although it would appear that Brits nationwide are now more than ever willing to splash the cash. Inflation in Britain is 2.7%; the highest in Europe. However, for the moment, it seems the effect is yet to dawn on the average shopper. The retail sector is naturally elated and, after riding a rough time during the crisis, they expect tills to ring this Christmas at there loudest since before the crisis and across the board are expecting record sales.

This is significant as retail accounts for 6% of the British economy and is a vital contributor to GDP. UK GDP for the third quarter will hit the headlines next week, and the majority of economists expect growth to pick up and rise from 0.7% to 0.9%. In other news, bricks and mortar continue to fly; the average house price in the U.K is now a quarter of a million. With one of the highest rates of home-ownership in the developed world, this is great news for the average home-owner. The cost of homes has led the government to lift the curtain on its controversial help-to-buy scheme, allowing would-be home-owners to crowbar their way into the house market with a deposit as little as 5%. This smash and grab approach is shaky on two fronts; firstly, interest rates are at historic lows and the housing market is at record highs. When rates rise, new home-owners may struggle to repay and, with average wages rising just 1%, this is a very real possibility. Many in the market are concerned, and this was reinforced yesterday by a Markit survey release revealing less than a quarter of households expect interest rates to stay low until 2016 despite Carney’s forward guidance. A staggering 69% of households expect a rate hike within the next 2 years. This is a significant contrast to the mid-2016 forecast of the MPC. Data releases like this go some way to demonstrate how fragile the market perception of QE is, hence the constant “will he won’t he” concerning Carney’s eventual rate change and QE slowdown.

There is no data releases out of the U.K today.

EUR

The euro put in a solid performance in trading yesterday, rising against the dollar and continuing to bounce near 20-month highs against sterling.

Euro bulls continue to kick around in the their pen. The current account was called to rise to 17.7bn. However, it came in notably short at 16.9bn and this was shrugged off. The main focus was trade surplus. The eurozone surplus in trade goods rose from 11.1bn to 14.7bn, a reflection of the weaker bloc members’ efforts to pursue export markets for growth as austerity measures weight on imports. The disparity between the bloc nations highlights the cartoon-like wacky races nature of the E.U. recovery race. The larger nations continue to strive forward as the weaker ones struggle to keep up. Germany and France are sat at the finish line watching the likes of Spain and Greece stagger around the track, although they are now gathering pace. The market is still overwhelmingly bullish. We have plenty of hot money hitting euro stocks and further fuelling the currency. Investors are increasingly willing to take long positions in the euro and its widely anticipated to continue to trade at high levels with plenty of investors bullish on Europe’s medium-long term prospects.

Data releases of note today will be Greek current account figures. These will be heavily looked over, firstly due to Greece being a weaker economy and the market wanting to see a universal pick up in the pace of recovery. Secondly due to the current tussle Greece is having with international lenders. The ECB and IMF is cajoling the government into accepting further austerity measures after locating a potential shortfall of 2bn in the latest budget draft.

USD

Dollar in the doldrums and falls against its most traded pairs. The dollar continues to get hammered and the relief rally was just a brief sideshow in what will now be a time of intense volatility. Jobless claims came in slightly better, although they were dropping from a 6-month high so nothing to get excited about. However, the Philly survey was strong.

A deal has been done and the government is now funded till January 15th and the debt limit has been extended to February 7. The price is not inexpensive and confidence in the U.S political and economical system is unlikely to recover for a long time. Fitch has put the U.S credit rating on watch and the Chinese have gone one step further with Dagong cutting the U.S sovereign rating yesterday.

The hit to Q4 growth will be fairly modest, growth will be sluggish, dealing tapering for some time. Strong Philly survey suggests the U.S weathered the first week well. The great unknown is the ripple effect to U.S business and the public.

The stock market could not care less. Wall Street is in a whirlwind and the S&P 500 closed at record highs, traders want QE to continue as it increases liquidity, thus pushing up stocks.

We have the fresh calendar for when anticipated U.S data will drop. The September labour market report will be released on Tuesday and the October report will not be available until November 18th. We expect traders will start focusing on when the Federal Reserve will start tapering. The Federal shutdown ensured it will not happen at the October meeting, due to a lack of data and intense market uncertainty and volatility. However, markets and analysts are being a little too quick to discount the possibility that it will happen at the next meeting. This is an entirely reasonable possibility if next week’s and next month’s payroll reports are even moderately strong.

Data of note out the U.S today includes Producer price index and we have various Fed members talking.

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Written by Tom Tong

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