Euro shrugs off dismal macroeconomic news and Draghi´s dovish rhetoric
11/Aug/2014 • Currency Updates•
Euro resilience last week was a bit of a puzzler. In addition to the now habitual drumbeat of negative economic news from the Eurozone, we saw more “verbal” intervention from President Draghi at the monthly ECB press conference trying to talk the currency down. In spite of this, the euro managed to close the week essentially unchanged against the dollar and sterling. Extreme short positioning in the euro appears to be the main explanation. Speculative bets against the euro are at the highest level since August 2012 according to the IMM report. As we have noted in the past, extreme positioning in either direction usually offers a contrarian signal that a currency is about to move against this consensus. We will have to see these positions cleared out somewhat before we see a resumption of the downward trend.
The somewhat mixed news out of the UK last week was consistent with a slight slowdown in economic momentum. This is to be expected, given the strong growth of the last two quarters. Slightly disappointing data on industrial production was balanced out by stronger business sentiment surveys in the services sector. Overall, the data was consistent with our expectations for growth in the 2.5%-3.0% range for the remainder of the year. However, we note that the inability of the Eurozone to sustain growth presents a significant downward risk to this forecast, as the Eurozone is the main trading partner of the UK. All eyes now switch to the Inflation report next week that will provide a crucial update on the MPC´s views on the precise timing of the first hikes in the Bank of England rate.
Yet another dismal week of data out of the Eurozone. Italy fell back into recession in the second quarter, although it is questionable whether it ever emerged from the previous one. Industrial production in the Eurozone failed to rebound from its large contraction in May, falling in June by another 0.2% MoM. German data was particularly disappointing. Economists were busy last week revising down their forecasts for Q2 growth in the Eurozone. It appears that the number next week will show yet another print of far less than 1%, making it the 12th consecutive quarter in which the currency area fails to achieve even 1.5% GDP growth. President Draghi´s press conference echoed this pessimistic outlook, and it included a very explicit attempt to talk down the euro in a tweet directly from the ECB that is worth quoting in full: “Fundamentals for a weaker exchange rate are today much better than a couple of months ago”. In spite of this, the common currency managed to end the week nearly unchanged. Doubtless, the record bearish consensus on the euro is providing some contrarian support to the currency, as it is often the case.
The data out last week in the United States were very strong. Particularly encouraging was the sharp drop in weekly initial jobless claims, down 14,000 to 289,000, and the 4-week average below the 300,000 mark at 293,000. This is possibly the most reliable high-frequency indicator available in the US. The ISM composite index of business sentiment reached a new high for the expansion in July. The Fed’s survey of financial institutions (SLOOS) was very upbeat, with an overall loan growth of nearly 9% saar in July. It is remarkable that this strength is not translating into a widening trade deficit, as the petroleum deficit shrinks rapidly thanks to domestic shale oil production. Last week’s numbers reaffirm our conviction that growth in the second half of 2014 will be in the 3.5-4% range and that the Federal Reserve will be the first of the four major central banks to hike rates early in 2015.