Currency markets appear to be dominated by a low appetite for risk.

Ebury, weekly currency outlook

Currency markets appear to be dominated by low risk appetite, as investors continue to reduce their record long positions in the US dollar. Despite negative news from the eurozone, both the euro and the pound sterling appreciated by more than 1% against the dollar last week.

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Volatility did not affect the currency market as severely as it did the rest of the financial markets. Risk aversion returned with force, causing stocks, commodities, and higher-risk bonds to depreciate sharply. Global equities are now trading flat on annual returns, while commodities and bonds are already trading at annual losses.

 

 

GBP

Economic data in the UK continue to show mixed signs, pointing to a possible downward shift in growth during the second half of the year. The manufacturing sector is clearly feeling the effects of renewed weakness in the eurozone. Industrial output is growing close to 0%, compared to single-digit growth in the second quarter. In the housing market, restrictions on risky lending appear to be taking their toll, with just over 28% of lenders extending their lending requirements in the third quarter to levels not seen since the 2008 financial crisis. It is difficult to see how house prices can continue to rise in this context. Nevertheless, the data are still fully compatible with our view that the Bank of England will not raise interest rates until April or May 2015. Indeed, unless we see a turnaround in the eurozone soon, this forecast will prove premature.

 

EUR

The clouds hanging over the eurozone economy darkened considerably with last week's data releases. German industrial production fell sharply, as did German exports. Italy and France also reported weak industrial production figures. We now believe that flat growth for the third quarter across the eurozone as a whole is a distinct possibility. Even more worrying than these negative data points is the absence of any indication that Germany is easing its austerity policies, despite increasing pressure from France, Italy, and now the ECB itself, led by President Draghi.

Following last week's data, we reaffirm our view that we are likely to see further aggressive action from the ECB, either next month or in December, and that the trend towards a weaker euro will continue as soon as extreme long dollar positions return.

 

USD

Very little significant economic data was released last week in the US. Some labor market indicators (weekly jobless claims and the JOLTS job openings survey) were consistent with a strengthening job market, which could easily move from the 225.000 new jobs per month we have seen in the last 6 months to something closer to 300.000.

 

Source: Ebury