In Europe the growth story seems
In line with what Mario dreams
Alas prices still
Have yet to fulfill
His targets despite all his schemes
If pressed, I would say the dollar is under mild pressure today, although the session has seen mixed price action across both G10 and EMG currencies. The standout performer this morning is clearly the euro, rallying nearly 0.7% after a run of strong macroeconomic data was released. GDP growth in Germany surprised on the high side, jumping 0.8% in Q3, far better than the expected 0.6% outturn and pushing the past four quarters growth rate to 2.8%. Similarly, Italian GDP growth improved, albeit not quite as much, with the past four quarters ticking over at 1.8% after a 0.5% reading in Q3. Interestingly, this improving growth trajectory has not yet impacted prices as they continue to underperform the ECB’s target of just below 2.0%. For example, German CPI is running at 1.6% while in Italy, it is just 1.1%. In other words, the disconnect between growth and inflation continues apace on the Continent as well as here in the US. Of course, as I have written many times, that view ignores the spectacular increase in asset prices we have seen during the grand monetary experiment known as QE. But for the market’s purposes today, what we have is continuing strong growth increasing the prospects that the ECB will continue along its painfully slow path of removing accommodation. Hence the euro’s solid performance.
On the flip side, there have been two G10 losers this morning, with SEK the biggest underperformer, falling 0.5%. CPI in Sweden was released at a less than expected -0.1% in October, which has both pundits and traders now looking for further QE rather than a mooted reduction going forward. Given the juxtaposition of this idea with the current mindset in both Washington and Frankfurt, it is no surprise the SEK has fallen. The other laggard this morning has been NZD, which seems to have borne the brunt of a rally in the AUDNZD cross. There was positive data out of Australia, and nothing from New Zealand, but in this instance, the cross move was driven by NZD selling. As I have written frequently before, sometimes FX markets are simply perverse in their movements.
Away from those three currencies, the rest of the G10 has done little, with both gainers and losers and all the price action contained in narrow ranges. That said, I would be remiss not to mention the pound where CPI printed at a slightly lower than expected 3.0%. This was key because governor Carney is spared the effort of writing to the Chancellor as to why inflation has strayed more than 1.0% from the 2.0% target. This is also key because virtually all forecasts going forward have this level as the peak inflation, with the impact of the pound’s post-Brexit weakness starting to come out of the data. Hence, for UK consumers, perhaps the worst of the inflation squeeze is over, which means that for now, we could see a little relief in the rhetoric on negative real-wage growth in the UK. Of course, with Brexit still on the horizon, and no apparent movement on the negotiations, I continue to look for the pound to decline going forward.
Pivoting to the EMG bloc, the dollar is under more consistent pressure here. It should be no surprise that the CE4 have all rallied alongside the euro, especially as growth in the Eurozone should lead directly to improved prospects in those currencies. Perhaps more surprising is the rally in the ZAR, up 0.7% this morning, after Deputy President, Cyril Ramaphosa, spoke and indicated he was trying to convince the budget chief to remain in his post, thus reducing the turmoil in the Finance department there. In other words, political machinations continue to be the key drivers in this currency, and I see no future where that changes at all. At this point, investors have lost confidence in the Zuma administration and its ability to manage the South African economy effectively. As I wrote yesterday, further downgrades to the credit rating seem likely and eventually a weaker rand alongside it. But not today. In fact, the only EMG currency that is weak this morning is RUB, which seems to be responding to the recent weakness in the price of oil, which after an extended run higher has fallen steadily for the past week. It remains difficult for me to envision oil prices greatly exceeding their current levels without some type of disruptive event, like the hurricanes in the Gulf back in September. However, there is no question that oil prices have momentum higher right now, and so I certainly don’t see a sharp decline in the near future either. For the petrocurrencies (RUB, MXN, NOK, CAD) I expect that we will see a choppy environment until it becomes clear if there is another leg higher on the way, or whether the fracking community will add enough supply to prevent future price hikes.
On the data front, the NFIB Small Business survey improved to 103.8, albeit a couple of tenths short of expectations, but still a very strong number. At 8:30 we will get PPI (exp 0.1%, 0.2% ex food & energy), but generally speaking, the FX market is far more interested in tomorrow’s CPI data than today’s PPI. We also hear from a bunch of Fed speakers, including Chair Yellen, but also Chicago’s Evans, St Louis’ Bullard and Atlanta’s Bostic. Yellen is on an ECB panel with Draghi, Kuroda and Carney that started earlier this morning but I have yet to see any commentary released. And while I am certain that those four are painfully aware of what happens when they make a comment deemed surprising by the market and so will work hard to avoid that occurring, sometimes it just happens anyway. Keep your eyes on the tape for any surprises.
But that’s really the day, with the euro continuing to be the best performer and likely to stay so for now.