US holiday makes for a quiet week in currency markets
01/Dec/2014 • Currency Updates•
Last week’s trading among major currencies was fairly subdued, in the absence of major news or announcements from the key central banks, and with US FX traders mostly looking forward to their Thanksgiving holiday. There was plenty of action away from currencies, however. Oil plunged more than 6% on news that OPEC had failed to agree to any cuts in output. Non-energy stocks and bonds rallied in tandem, as the fall in oil prices was seen as in effect a tax cut on consumers and investment. G10 currencies mostly traded in a tight range against one another while emerging market currencies mostly underperformed, helping the US Dollar trade to another cycle high in trade-weighted terms.
The trading week in the UK revolved around two events; the release of the second estimate for third-quarter GDP growth, and the testimony of MPC members before the Treasury Select Committee with neither departing much from script. Growth was unrevised at a solid 2.8% QoQ, however, net trade is becoming a noticeable drag on the economy, as past Sterling strength and Eurozone stagnation take their toll on exports; last quarter, trade subtracted two full points from the above figure. On the GBP-positive side, MPC member Kristin Forbes revealed that she is close to changing her vote and ask for an immediate hike, which would cut down the on-hold majority at the MPC to 6-3. Overall, then, mixed news for Pound, which ended the week close to unchanged versus both the US Dollar and the Euro.
News out of the Eurozone was again disappointing last week. Inflation dropped again, to 0.3%. Although the recent drop in oil is generally positive news for the energy-importing Eurozone, it also makes it likely that there will be a negative headline print at some point in the first quarter of 2015. Unemployment was stable at a sky high 11.5%, but the number of unemployed is no longer shrinking, and we have actually had two consecutive months of increases, driven mostly by dismal Italian numbers. In this context, next week we expect President Draghi to once again carry his views over Bundesbank resistance and announce further easing measures.
We had mixed news out of the holiday-shortened week in the US. Third quarter GDP was revised up, from the initial 3.3% to 3.9%. Half of the revision was due to inventory build-up and will probably be given back next quarter, but the other half was due to stronger-than-expected demand and bodes well for fourth quarter momentum. On the negative side, core shipments of capital goods (ex- the volatile sectors of defence and transportation) were no better than flat MoM in October. Housing data was also flat. On net, the data was consistent with our view of 3% growth over the next few quarters. The recent drop in oil prices amount to a moderate boost for household real incomes and a corresponding improvement in the balance of trade. The tailwinds for the US economy in 2015 will mean that the Fed is “on track” for hikes and the US Dollar is “on track” for a further rally.