Strong start for the dollar in 2014
06/Jan/2014 • Currency Updates•
The key trends in financial markets for 2013 continued strongly into year end. Equities worldwide rallied strongly. Government bonds, in particular Gilts and Treasuries, struggled, and 10 year rates in both instruments closed the year above the psychologically important 3% level. In the absence of significant macroeconomic or policy news, FX markets took their cues from rates, and both the dollar and sterling rallied in the first week of the year against other G10 currencies. The economic calendar next week is packed, and investors will be focusing on the monthly ECB and Bank of England meetings on Thursday, followed by the all-important jobs report in the US on Friday.
There were few releases of note in the UK over the holidays. The most meaningful one, PMI business sentiment in manufacturing, pulled back slightly, but both it and its key components remain consistent with moderate expansion in the sector. Economists’ consensus still expect 4Q GDP growth to come in somewhere near the 3% mark yoy, and we see no reason to disagree. Sterling is once again moving as a low-beta version of the US dollar, and last week it rallied by about 0.5% against the Euro and lost a slightly higher amount against the greenback. This is a trend that we expect to continue through 2014.
The moderate rebound in manufacturing sentiment continued in December, as the PMI survey rose to 52. The details were mixed. Most periphery countries are now hovering near the 50-level separating growth from contraction, but French numbers continue to sink into contraction territory. The PMI adds to the sense that the French economy is re-entering recession, not having really had much of a recovery anyway. At any rate, the PMI was largely ignored by FX markets, who chose to focus instead on the widening rate differentials between Treasuries and Gilts on the one hand, and core European sovereigns on the other. As a result, the euro lost well over a figure against the dollar and nearly one full figure against sterling last week.
Data releases over the holidays were generally on the strong side in the US. Durable goods orders (a proxy for capital spending), manufacturing sentiment and housing all came in stronger than expected. It is now likely that 2013 GDP growth will print just above 2%, right in our forecast range and somewhat above what consensus had been expecting only a few weeks ago. This performance in the face of significant fiscal drags is remarkable, at least in this age of diminished expectations, and particularly when compared to other major advanced economies. All eyes now shift to the payroll report on Friday. We expect another moderately strong report, in line with those of the past 6 months, which should give the green light to another reduction in asset purchases by the Fed to be announced at the FOMC meeting later this month.