Ebury, weekly currency outlook
Financial markets moved in a disjointed manner last week. While the dollar fell against most other G-10 currencies, particularly the euro, the performance of most risk assets was quite negative, which is typically associated with a stronger dollar.
The most likely explanation is that investors are adjusting their positions for the end of the year, withdrawing their best investment trades of 2014 (with the dollar and stocks on the rise) as liquidity drains from the markets. Commodity prices deserve special mention. Most commodity indices have fallen by more than 20% year-to-date, and oil has nearly halved. We believe this decline has a tax-cut effect for most G-10 consumers, although the resulting drop in overall inflation may have a negative impact, reinforcing deflationary expectations in the eurozone.
GBP
Last week, macroeconomic data from the UK was mixed. Industrial production and construction output both declined in October, by 0,1% and 2,2% year-on-year respectively. Meanwhile, the November housing market report showed a decrease in sales and a stabilization of prices. Overall, last week's reports do not pose a downside risk to the 3% GDP growth forecast for the fourth quarter of 2014.
There were also some important changes to the Bank of England's communication policies, although these will not be implemented until well into 2015. First, from August of next year, the minutes of Bank of England meetings will be published simultaneously with the announcement of the interest rate decision, rather than three weeks later. Second, in 2016 the number of meetings will be reduced from 12 to 8 per year. While these are significant changes, none are expected to impact the timing of interest rate hikes next year.
EUR
The main news last week was the disappointing second round of ultra-cheap TLTRO funding for eurozone banks. Contrary to our expectations that this round would be more substantial than the first, only 306 banks accessed just under €130.000 billion in total, well below the consensus of €150.000 billion. Industrial production disappointed once again, rising by only 0,1% month-on-month. The Eurogroup debate on the 2015 budget plans for individual countries left little doubt that Brussels continues to insist on fiscal adjustments, further budget cuts, and tax increases, particularly for France, Spain, Italy, and Portugal.
The end result of this chain of negative events is that the ECB can no longer afford to delay the implementation of further quantitative easing measures, particularly direct purchases of euro area sovereign bonds. We see no other way for the ECB to achieve its balance sheet target of 2012 levels – the disappointing round of ultra-cheap funding has made it clear that banks have no interest in helping the ECB reach this goal. We therefore expect the ECB to announce quantitative easing measures at its January meeting.
USD
US economic data supports the theory that the economic gap between the two sides of the Atlantic continues to widen. November retail sales were much stronger than expected, growing 0,7% month-over-month. The combination of employment figures and energy prices is already impacting both consumer spending and consumer confidence. All eyes are on next week's FOMC meeting, which will be followed by a press conference, new economic forecasts, and each FOMC member's expectations regarding interest rate hikes at the close of fiscal years 2015, 2016, and 2017.
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