Strong ISM numbers in the United States yesterday briefly took US equities to new record highs, as US manufacturing firms declared their confidence in US future economic prospects. As President Clinton once said in a speech to Congress.. “The state of our Union is strong!”. Still.. it’s worth noting that the retail sales numbers that came out of the Eurozone earlier yesterday was also better than expected too. Perhaps we’re starting to see the effects of the calamitous decline in energy prices? Perhaps…
ADP non-farm employment data disappointed somewhat, so it will be interesting to see what becomes of the bigger employment data on Friday. These things are never as obvious as it seems however, particularly given the way the data is presented, at certain times what might superficially look like a poor number might actually be as a result of people who had previously given up looking for jobs stepping forward once more boosting the number of jobseekers. In short, sometimes, what looks like a poor employment number might actually be a sign of increased confidence. I’ll leave it to the experts to tell us what’s what!
In currency space, some of the most under pressure emerging currency markets have retreated from the abyss, as energy prices continue to consolidate near their year to date lows. As I keep on saying, trends need breathers every now and then for sustainability. We will need to observe the price action in the coming days and weeks to ascertain whether oil prices have indeed found their base. I believe it’s safe to assume that commodity exposed currencies (which aren’t all in the developing space – CAD, AUD, NZD) will be hostage to the fortunes of the energy complex for now.
This leads us to the major currencies. The Japanese yen has been within a whisker of 120! The last time we saw such levels was way back in 2007. At that time the pair hit a high of 124.16, and while I believe the bullish rally is mature, it is conceivable that there will be a serious attempt to reach those levels again before any correction occurs. I will say this though.. I believe at this stage in the game it is more likely for us to see 110 before we see 130, but that doesn’t mean to say that we won’t get to such rarefied levels. As I’ve mentioned before, I am unsure of the logic of QE in Japan at this stage. It’s not clear to me that it benefits corporates on the whole, and I certainly don’t see higher inflation helping a country with one of the worst demographics in the world – after all.. more pensioners use diapers in Japan than babies! How are people who depend on the fixed incomes of their pensions going to benefit from higher inflation? The only winner is the Japanese government, and while the central bank continues to buy government bonds (JGB) perhaps disaster can be averted, but woe to all of us if everyone else decides it makes no sense to hold JGB’s anymore.
As I observed yesterday, it appears that the pause in the dollar bull trend is over. Of the major currencies the euro, Japanese yen, Australian dollar, Swedish krone, Norwegian krone and Swiss franc have all made lows in the last 48 hours versus the US dollar. I think it’s fair to say the bull is snorting! I’m not surprised that pound sterling is showing a bit more evidence of resistance, but I’ll admit that both the Canadian dollar and New Zealand dollar (commodity exposed no less) have been a bit surprising.
Today is a big day for data that could impact the macro-scope. Both the Bank of England and ECB will announce their rate decisions, and while we don’t expect any changes, it’s what they say – more specifically what Mr Draghi says – that will matter. Given that we’ve just seen worse than expected unemployment data out of France this morning, and the fact that inflation data remains weak, we expect Mr Draghi to continue to talk about extraordinary methods to expand the Eurozone central bank balance sheet. Again.. as I’ve said before… falling oil prices are a good thing and a boost to the European consumer, but I’m sure that an energy induced price fall will be used to aid Mr Draghi’s objective. His speech begins at 1330hrs UK time. Not much else for us on the data front, apart from Canadian PMI’s. Perhaps that, along with the unchanged rate decision last night, will help me understand why the Canadian dollar appears to be doing better than I would expect!