FX volatility hits new lows as G10 currencies trade in their tightest ranges of the year
28/Apr/2014 • Currency Updates•
FX markets last week saw a continuation of the Easter holiday torpor. Sterling, yen, the dollar and the euro all traded throughout the week within a roughly 0.5% range, making this perhaps the most tranquil week in currency markets since the 2008-9 crisis. This dead calm can be explained by the absence of dramatic macroeconomic or policy news, as well as the apparent conviction among market participants that the crisis in Ukraine will have no major macroeconomic effect worldwide. We expect volatility to return next week as a number of significant events are on tap. Besides the all-important US payroll number on Friday, we also have the Bank of Japan monetary statement, the critical Eurozone inflation number and UK first quarter GDP growth.
The minutes of this month’s MPC meeting confirmed that the Bank of England is gradually raising its expectations for UK economic performance. It now expects first-quarter growth above 3.5% qoq SAAR, somewhat above market consensus but in line with our own views. Otherwise, there were no major changes in the members’ expectations for inflation or the amount of slack in the economy. Second-tier economic data released during the week provided further evidence of a strengthening economy that is growing strongly, as retail sales rose 4% qoq SAAR in the first quarter. Sterling continues to trade in a tight range near multi-year highs against both the dollar and the euro, buoyed by this strong economic performance.
PMI business sentiment indicators for April came out stronger than expected in the Eurozone. The composite number rose 0.9 to 54, and the gains were broadly distributed between the core and the periphery. Spain first-quarter GDP growth also came in a bit stronger than expected, although at 1.6% qoq SAAR, it is still insufficient to make a dent in the country’s unemployment rate. Next week we get two critical pieces of Eurozone data: inflation and unemployment. Consensus expects the former to rebound from 0.5% to 0.8%, and unemployment to remain stable at 11.9%. Any downside surprise in inflation will raise the prospect of a cut in rates by the ECB at either the May or the June meeting, with the consequent downward pressure on the common currency.
The mostly second-tier data out last week in the US paints an upbeat picture of the manufacturing sector, together with a less encouraging outlook in housing. Both the PMI sentiment numbers and the timely but volatile durable goods orders were stronger than expected, and the strength was broad based. The numbers are consistent with annualised expansion in the sector in the high single digits, which is a reassuringly strong performance. By contrast, new home sales fell nearly 15% in March. It is unclear to what extent the housing slowdown is due to severe weather, or whether higher mortgage rates are starting to bite. The April numbers to be published next month take on special importance, as a failure to rebound would indicate the housing slowdown is cyclical rather than temporary.