Currencies trade in tight ranges in the absence of major news
14/Jul/2014 • Currency Updates•
Major G10 currencies traded last week in perhaps the tightest ranges of the year, as Euro, Sterling and the dollar all moved by considerably less than 1% against each other to end the week nearly unchanged. Beyond FX, risk assets had a bit of a rough time on news that a major Portuguese bank was in difficulties. Equities, credit and peripheral bonds pulled back from recent record highs, and Bunds and Treasuries rallied. However, the Euro largely shook off the troubles in the periphery and held its own well against every other major currency.
We had a rare spate of weak data in the UK last week. Industrial production and construction both fell in May, by 0.7% and 1.7% respectively. However, this data is prone to revision and contrast with more recent strong indications of activity. At any rate, it is clear that the MPC is focused on the labor market, and the exact timing of the first hike will depend on the evolution of unemployment and, critically, a pick up in pay. The absence of any wage pressure in spite of strong job creation drives our call for the first quarter of 2015 as the most likely time frame for the first rise in rates from the Bank of England.
Industrial production data for May in the Eurozone came out much below expectations, posting large drop in all the major European economies. Putting this data together with disappointing retail sales and other indicators implies that growth in the second quarter will struggle to break above 1% QoQ, which is insufficient to either make a significant dent on economic slack or to put peripheral debt burdens on a sustainable path. More dramatic were the news that the largest listed Portuguese bank, Banco Espiritu Santo, was in some trouble due to bad investments in its holding company. We think that Portugal has both the will and the European support to nationalize the lender if necessary, and expect the damage to be contained, but this is a timely reminder that the periphery’s troubles are far form over.
Very little market moving news come out of the US last week. Some second tier labor market indicators confirmed the strength of the current jobs recovery. The so-called JOLTS report pointed to another large increase in unfilled job openings, consistent with continued job growth in the 250-300,000 range we have seen recently.Even more encouragingly, the number of “voluntary quits” continues to head upwards. This is a key sign of workers confidence that the Federal Reserve follows closely. The FOMC minutes confirmed that the Fed is moving closer to an exit for zero interest rates, and it expects to finish the taper and stop completely purchases of Treasury and mortgage bonds by October. We think that it will then move to hike rates in the first quarter of 2015.