Dollar rally takes a breather as equities and commodities tumble worldwide
13/Oct/2014 • Currency Updates•
Trading in currency markets appeared to be dominated by position squaring, as traders continue to reduce their record long positions in the US Dollar. In spite of dismal Eurozone news, the common currency and Sterling both rallied by over 1% against the greenback.
Most of the action was away from currency markets. Risk aversion returned with a vengeance, driving world equities, commodities and riskier bonds down sharply. World equities are now flat for the year, and commodities and credit are for the most part actually losing money, a position asset managers had not been in for quite some time.
Economic data in the UK continues to turn more mixed, signalling a possible downshift in growth over the second half of the year. The manufacturing sector is clearly experiencing the effects of renewed Eurozone weakness. Industrial production is now about flat, down from a high single digit growth rate in the second quarter. In the housing market, restrictions on high loan-to-income lending appears to be having its desired effect, and then some: a net balance of 28% of lenders reported tightening their lending conditions in Q3, a drop not seen since the 2008/9 crisis. It is difficult to see how housing prices can continue to rise in this context. All in all, the data is still fully consistent with our view that the Bank of England will not hike interest rates until April or May of 2015. In fact, unless we see Eurozone data start turning around soon, even that timetable will prove too aggressive.
The clouds hovering over the Eurozone economy darkened noticeably with last week’s data releases. German industrial production fell sharply, as did German exports. Italy and France also released weak industrial production data. We now think a flat reading for growth in the third quarter in the Eurozone as a whole is a distinct possibility. Even more troubling that this negative data, is the absence of any indication that Germany is softening its tight budget policy, in spite of increasing pressure from France, Italy and now the ECB itself, led by President Draghi.
Last week’s releases reaffirm our view that we are likely to see further aggressive action by the ECB either next month or in December, and that the trend towards a weaker Euro will continue as soon as the extreme Dollar long positions in the markets clear somewhat.
Very little actual economic data was released last week in the US. Some labour market indicators (weekly jobless claims and JOLTS survey of job openings were consistent with a strengthening labour market, which could easily move from the 225k new jobs per month we have seen over the last 6 months to something closer to 300k.
The main news was the surprisingly dovish tone from the minutes of the September FOMC meeting. The “considerable time” phrase describing the expected time between the end of the taper (later this month) and the first Fed hike was left unchanged. Most surprisingly, some FOMC members expressed their concern for Eurozone weakness and the strength of the Dollar. Comments on the currency in particular, the Federal Reserve have always left to Treasury officials. We still expect a first interest rate hike in March, but continued Eurozone weakness and global market instability may force us to push that date back. Stay tuned.