Ebury Weekly Analysis
The market for the world's major currencies, also known as G10 currencies, had no major shocks last week, in the absence of top-line economic data releases or monetary policy decisions.
However, the pound sterling deserves special mention, as it was the best performing currency against its major peers, following the release of strong UK labor market data.
Meanwhile, the euro fell against the dollar to a seven-month low, due to weak data in the Eurozone and the increased likelihood that the European Central Bank will expand its stimulus program at its December meeting, which in our view should continue to put downward pressure on the euro in the long term.
Weak data from China and renewed widespread risk aversion triggered declines in stocks and commodity prices across global markets last week, while some emerging market currencies continued to lose ground. This all contributed to the dollar reaching new multi-year highs on a weighted basis.
EUROZONE AND THE EURO
The constant flow of weak data in the Eurozone seems to confirm, in our opinion, the expansion in December of the program of expansionary measures by the European Central Bank.
Third-quarter GDP grew by only 1,2% on an annualized basis, falling short of modest expectations of 1,6%. The weakness of German industrial production data, even before the full effects of the Volkswagen scandal are felt, does not bode well for the final quarter of the year. Furthermore, a new political front has opened in Portugal, where a coalition of left-wing parties will govern on an anti-austerity platform. Given this overall situation, the only thing that can help the Eurozone economy at the moment is the continued competitive devaluation of the currency, and consequently, we have revised our euro outlook downwards – we now expect the euro to reach parity with the US dollar in early 2016.
UNITED KINGDOM AND THE POUND
The main news story last week was the release of the UK jobs report. The news was somewhat mixed, although currency markets chose to focus on the positives, with the pound ending the week as the biggest gainer. Unemployment fell again to 5,2%, and September ended with strong net job creation. However, wage growth slowed from 3,2% to an annualized 2,8%. This level remains above core inflation, but the slowdown means that inflationary pressures remain subdued, and the Bank of England can afford to wait before changing the course of its monetary policy.
There is concern in the markets about the Bank of England's monetary policy outlook. We do not foresee a rate hike by the British authorities until the summer of 2016 – although interest rate markets are pricing in even more significant delays to the UK's rate hike schedule.
UNITED STATES AND THE DOLLAR
October retail sales were somewhat weaker than expected, growing only 0,1% for the month and 0,2% excluding auto and gasoline sales, although this was partially offset by improved consumer confidence data. Overall, these figures are relatively consistent with the expected scenario in the United States: steady growth of around 2-3%, continued job creation, and sufficient support for the Fed to begin raising rates in December, at a pace of roughly 0,25% per quarter. This should be enough to allow for the continued and gradual appreciation of the US dollar against most G-10 currencies.
Source: Ebury
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