While viewing his new crystal ball
Signor Draghi told one and all
More wage gains are pending
So go on, start spending
Lest growth heads back to a slow crawl
First a mea culpa: yesterday I wrote that the Da Vinci painting sold for the equivalent of 175 tons of gold. Well, early in the morning, apparently my math skills were somewhat impaired. A much better estimate is 12 tons of gold, still, an awful lot of money! My apologies for any confusion.
As the week comes to a close, a review of FX price action in the G10 shows a tale of two themes. On the plus side, the euro rallied more than 1% as economic data continues to perform well and confidence in the Eurozone economy’s growth improves despite the potential political pitfalls on the horizon. These pitfalls include the possible (likely?) failure of the German governing coalition talks leading to the need for an unprecedented second election, and the improving poll numbers of the Five Star Movement in Italy leading up to the general elections there due in March. But thus far, all economic signs continue to point to gathering strength in the economy as the employment situation there is rapidly improving. In fact, despite the highest labor force participation rate in two decades, the unemployment rate has fallen to its lowest level since 2009. So more people are working than ever before, clearly a positive sign for the economy. Yet wage gains remain elusive continent-wide (as they do elsewhere in the developed world), and so Draghi was once again beating the drum as to why ECB policies have been successful and why wage gains are sure to follow. We also saw strength in the haven assets, JPY and CHF, albeit not quite to the extent of the euro, with weekly gains of 0.4% and 0.8% respectively.
Commodity currencies, on the other hand, have suffered greatly this week, with NZD leading the way lower, down more than 2.1%, AUD -1.5%, NOK -0.85% and CAD -0.5%. This is in keeping with weaker commodity prices overall. For example, despite a 2% rally this morning, WTI is still down almost 3% in the past week. We have seen similar price action in base metals and agriculturals as well. The only currency I’ve left out is the pound, which is essentially unchanged on the week as mixed data and the ever-changing Brexit debate conspire to confuse investors.
The weekly view in the emerging markets showed far more winners than losers, which contradicts the idea that risk was being jettisoned. The biggest mover of the week was ZAR, rallying 3% on the idea that its inclusion as a carry trade by Goldman Sachs as a ‘top ten trade for 2018’ will overshadow the ongoing political miasma that is impairing efforts at improving the economy there. The other large gainers were KRW, +1.8%, on the back of potentially reduced tension with North Korea after a high-level Chinese delegation visited for the first time in two years; and of course, the CE4 all performed well on the back of the euro’s strength. Notably absent from the move were LATAM currencies, none of which moved more than 0.25%, and the rest of APAC, where only the THB was able to muster gains greater than 0.5% after economic growth looked to be catching up to the rest of SE Asia led by a booming export sector.
To sum it up, it appears more like we are witnessing USD weakness rather than a risk-off move, with the commodity currencies the outlier on the back of weakening prices there. After all, despite all the gnashing of teeth earlier in the week, the S&P 500 is essentially unchanged this week, not demonstrating any major liquidation of assets.
On the data front, yesterday’s IP and Capacity Utilization data were both far more robust than expected and Philly Fed, although not quite achieving expectations, remains quite strong at 22.7, remaining within the top decile of its historical readings. This morning brings us Housing Starts (exp 1190K) and Building Permits (1250K) which if realized would continue the gradually improving trend in the housing sector. Of course the other big story in the US is the tax reform legislation saga, which yesterday passed a milestone as the House approved their version of the legislation. However, as it is quite different in some areas than the Senate version being discussed, we are not yet that close to a finished product and there remains ample opportunity for nothing to be accomplished. If pressed, I would anticipate that something will get passed along party lines, but the end result will not have nearly the positive impact that was hoped for at the time of President Trump’s election last year. However, as yesterday’s sharp rally in the stock market shows, investors clearly see the glass as half full!
The dollar is an afterthought in markets these days, with far more attention being paid to politics and its impact on equity prices. Even Fedspeak doesn’t seem to excite much, probably because the comments we have heard lately tend toward the technical rather than being policy focused. For example, when SF President Williams talked about changing the way the Fed communicates, (which I personally think is a good idea), traders don’t react. The interest rate debate remains on hold, with the Fed still talking three hikes next year and the market still pricing in just more than one. But until we start seeing the economic data unfold, there will be no way to determine who is right. As to today, with equity futures a touch softer and Treasury yields down 1bp, it is difficult to get excited about any potential large moves. Rather, I expect with the US going into holiday mode (can you believe Thanksgiving is next Thursday?), a quiet session with limited further movement is on the cards.
Good luck and good weekend