Euro resumes downward trend as calm returns to markets
27/Oct/2014 • Currency Updates•
Last week, foreign exchange markets returned to something like their summer calm after the violent swings of the week before. Risk appetite returned to equity markets, which have recovered on average about half of the 10% swoon they experienced in October. Currencies largely ignored the swings in other asset classes, and the week largely reflected the trends we have seen since the summer among G10 currencies: slow but steady Euro and Yen depreciation against the Dollar and, to a lesser extent, Sterling. Emerging market currencies, however, benefited from the buoyant equity markets and rose against all G10 currencies with the conspicuous exception of the Brazilian Real, where investors are nervous about the upcoming Presidential election.
Two UK releases focused investors’ attention last week: third-quarter GDP growth, and the release of the Minutes of the October MPC meeting. The former came out right on consensus at 0.7% or 2.8% in annualised terms. The Minutes were more dovish than most had expected, and fully in line with a view that the first Bank of England interest rate hike will be delayed at least into the second quarter of 2015. The Members show increased concern about the Eurozone economy, and are generally more pessimistic about the global outlook that they were in September. Retail sales and mortgage approvals in September also sounded a mildly negative note, down 0.3% m/m and 2,000 respectively. Sterling, however, was able to look past all of this and barely moved, up about 0.3% against the Euro and down roughly the same amount against the US Dollar.
Last week saw a rare bit of good Economic news out of the Eurozone. The October business sentiment PMI index broke its recent negative streak and rose slightly, by 0.2 to 52.2. The good (or at least, not-bad) news were widespread, and only France saw a sizeable drop in its national PMI. The situation remains dire, but the chances that fourth-quarter GDP will show an actual contraction have now diminished somewhat. We still expect further ECB announcements of additional purchases of financial assets at each of the November and December meetings amid a continuation of the downward trend in inflation towards negative prints.
Over the weekend, the results of the Asset Quality Review (AQR) of stress-tested European Union balance sheets were published. The biggest losers were Italian banks, as nine of them, out of a total of 25, were deemed to require additional capital. The results do not seem to diverge much from expectations, though we think they will bring renewed investor focus on Italian macroeconomic performance over the remainder of the year.
As is usually the case in the latter part of the month, there was little economic news of consequence out of the US. The 4-week average of new weekly jobless claims fell again to 281,000 in the week to October 18th, hitting yet another low for the current cycle and pointing to accelerating labour market strength. All eyes now shift to the FOMC meeting next week, where the Fed is expected to announce the end of asset purchases and possibly offer more concrete guidance on the timing of the first hike in interest rates. We reiterate our expectations that this will happen sometime in the second quarter of 2015 and, at any event, before the Bank of England increases interest rates in the UK.