Below trend growth to continue
There’s still two hours to go until the New York close, but foreign exchange markets are having their biggest night of the year so far.
There’s still two hours to go until the New York close, but foreign exchange markets are having their biggest night of the year so far. The dollar has been dumped quite unceremoniously and across the board. In G10, four currencies have posted gains in excess of 2% since the start of yesterday’s APAC session: NZD (+2.6%), JPY (2.3%), NOK (+2.1%) and AUD (2.1%). No currency has gained by less than 1.5% – that dubious honour bestowed on the British Pound. That this is a very broad-based US dollar sell-off encompassing all major currencies and most emerging market ones, is shown by the fact that the currencies of only six of the 31 countries comprising Bloomberg’s ‘Expanded Majors’ currency tables are weaker over the past 24 hours: S.Korea (-1%), Indonesia (-0.6%), Taiwan (-0.5%), Malaysia (-0.3%), Argentine (-0.2%) and India (-0.1%). In index terms, the narrow DXY is -1.8% as we type and Bloomberg’s broader BBDXY index down by 1.6%.
Since deepening US growth concern are the proximate cause of this dollar capitulation (see below) it might surprise some to see oil prices more than $2 higher – despite another bigger than expected build in oil inventories reported by the EIA. It seems pretty clear than on this occasion, it is the weaker dollar (that makes oil cheaper for non-US dollar based purchasers) that has driven the bounce.
Equities were in a sea of red throughout Asia and Euro, but US stocks are more mixed headed into the close with the Dow and S&P500 currently up 0.5% on the day. Doubtless the weaker dollar and the latest Fed mood-music emanating from NY Fed President Dudley (through sounding more like the screeches from an amateur violinist) – are relevant here. In bonds, 2-year German yields have fallen below 0.5% for the first time while the US treasury curve has actually undertaken a mild bear steepening (2s +1bps and 10s +3bps.
Dudley came before the data. Broadcast around 08:15 NY time via Market News International (MNI) choice quotes included:
“One thing I think we can say with more confidence is that financial conditions are considerably tighter than they were at the time of the December meeting…..so if those financial conditions were to remain in place by the time we get to the March meeting, we would have to take that into consideration in terms of that monetary policy decision.”
“On the one hand, you look at the U.S. and you say the direct effect of that to the U.S. is pretty limited, but obviously if the global economy were to take a significant downturn, or if all this pressure were to lead to a significant appreciation of the dollar, then it could have significant consequences back to the U.S.”
Less than two hours later, the US non-manufacturing ISM (PMI) came in almost two points below consensus at 53.5 (from 55.3 previously and 55.1 expected). This included a fall in the employment sub-index to 52.1 from 56.3. It was last lower in April 2014. The earlier ADP employment reading came in 205k, just above the current 190k consensus for Friday’s non-farm payrolls. Forecast for the latter might now being revised down after the ISM.
A bit of a lull in the data flow ahead of US payrolls tomorrow. RBNZ assistant governor John McDermott speaks in Sydney at 09:30 AEST, and NAB’s quarterly business survey is due at 11:30 AEST.
Offshore, the BoE hands down its latest policy decision, together with the immediate release of the Minutes and the Quarterly Inflation Report. This comes at a time when the UK money market has started to price in the possibility of the next moves on rates being a cut (there is currently about 9bp of easing priced into the OIS curve over the coming 12 months). The US calendar is confined to weekly jobless claims and factory goods orders. More interest will be in speeches from the Fed’s Rosengren and Kaplan.
On global stock markets, the S&P 500 is +0.50%. Bond markets sees US 10-years +3.3bp to 1.88%. On commodity markets, Brent crude oil +7.12% to $35.05, gold+1.0% to $1,139, iron ore +1.8% to $44.63. AUD is at 0.7175 and the range has been 0.7003 to 0.7189.
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