Dollar soars on the back of strong August payrolls, sluggish data elsewhere
06/Oct/2014 • Currency Updates•
The Dollar rally actually picked up speed last week, in spite of increasingly stretched long positioning among traders. Buying the Dollar is becoming a one-way bet from strategists and commentators. While we welcome the fact that consensus is coming around to our long-held views, we wouldn’t be too surprised to see a stabilisation or even a small short-term retracement after the breathless moves of the past few weeks. At any rate, the strong payroll report out of the US highlighted the widening gulf in economic performance between the US and the rest of the world. Sterling and the Euro are both flirting with psychologically important levels, after a week in which the greenback rose by 1.6% and 1.3% against the main European currencies.
Data out last week was clearly consistent with the softer growth we have been forecasting for some months. This had mostly to do with the manufacturing sector, which is exactly where one would expect the effects of the struggling Eurozone economy to be felt first. By contrast, the domestic-demand riven services sector is holding up better. Thus, the September manufacturing PMI index of business confidence fell from 52.2 to 51.6, and the details were even weaker, with the leading new orders component down to 50.5. We also saw a significant drop in the services PMI, but at 58.7 this remains consistent with healthy growth in the demand for services. The data is not dramatic, but clearly supports our expectation of slowing growth in the UK over the next few months. We remain confident that markets are pricing in too aggressive a timetable for hikes from the Bank of England, and we now expect the hikes to be delayed until well into the second quarter of next year.
Markets were rightly focused on the outcome of the ECB monthly meeting for October. Communications from the central bank focused on the implementation of the Asset-Backed Securities (ABS) purchase program. While much of the information released was highly technical in nature, one aspect stuck out: the ECB will purchase both assets that had been passed onto third parties *and* those that had been retained by the owning banks in their balance sheet. This suggests a more aggressive program than had initially been envisioned, and indicates that President Draghi continues to be worried by the deflationary pressures evident in the Eurozone and the lack of traction from monetary policy to the real economy. The threat of deflation remains as strong as ever. Headline inflation fell yet again to 0.3% YoY; even more worrisome, core inflation fell 0.2% to 0.7%. Consensus had expected both to stay unchanged. We therefore maintain our expectation of additional easing measures from the ECB before the end of the year, with one caveat: a hypothetical fall in the Euro below the 1.20 level or so is likely to relieve some of the pressure on the ECB to act.
A data-rich economic week out of the US was fully consistent with our view of solid and strengthening growth. The September employment report blew away expectations. 248,000 net jobs were created during the month, and previous months were revised up significantly, so that average job creation over the past 6 months is now around 225,000. Furthermore, the separate household survey showed a drop of the unemployment rate to 5.9%. The PMI numbers also grew strongly, and the manufacturing index in particular appears to indicate that factory output and capex will continue to grow somewhere in the high single digits. The gap between the strong US economy and the European and Japanese sluggishness continues to grow, and this was logically reflected in another strong week of increases for the Dollar against every other major currency.