It looks like the trend for global equities is down, as the S&P 500 has made lower lows and lower highs in the last few days. Why do I spend so much time talking about equities and other non-currency asset classes when my special interest is currencies? One simple answer… sentiment. The appetite for risk is most obviously expressed via equities, but we see it in currencies as well. Furthermore, when we can appreciate the inter-market relationships and correlations between asset classes, we get a better sense of what is likely to happen. Over the last 6 months we have noted the positive relationship between the US dollar and equities – when equities have rallied so has the US dollar. This is important, as it tells us that the US dollar is sensitive to positive expectations for global growth. It has also meant, that whenever we have heard anything that implies that global growth prospects are not as constructive as we had previously assumed, we don’t even have to check the screens to know that currency pairs like EUR/USD would be going higher because the US dollar has weakened. At the moment the relationship between the US dollar and equities is not as certain as it has been in recent months. I’m not here to make a claim that the relationship has changed, but it is new information and merits further observation. It could reveal the next compelling narrative that macro watchers need to keep in mind… then again, it’s just a few data points, and that doesn’t make a sample… yet.
The decline in energy prices continues relentlessly. WTI for February delivery trades comfortably below $45, and frankly, studying the chart it’s getting difficult to suggest we won’t see prices below $40 in the near future. I’m not sure we’ve been this low in 6 years. Pump prices will get cheaper, and this morning I’ve heard that a gas supplier in the UK is lowering prices by 3.5% with immediate effect. In isolation these are small things, but when you consider the cumulative boost to disposable income for the ordinary family, this represents a massive multi-billion dollar stimulus. Only in the Eurozone will this news be taken, rather ridiculously, as a negative, with deflationary concerns getting priority there. The most important point is that consumers will have more cash to spend and we are likely to see increasing evidence of this going forward. Obviously this is not such a happy story for oil producers, but the world as a whole will benefit.
In another sign of the softness of economic conditions in the UK, an important retail sales monitor disappointed quite badly this morning – the BRC Retail Sales monitor came in at -0.4% versus +0.9% previously, less than the forecast of +0.6%. But somehow I expect the market will be focussed on the inflation numbers due within the hour. Expectations are for the lowest UK inflation data in over a decade, but I suspect the Bank of England, like the Federal Reserve will take the sensible approach and look through the disinflationary effect of falling energy prices. Later on in the day, we have some chain store sales in the US which could add some colour to Christmas period shopping, we also get a small business survey which I think could be important considering that the SME space is responsible for the lion share of job creation, another job related data point coming out is the JOLTs Job Openings report. As I’ve said before job creation, and more specifically a tightening labour market and its impact on wage growth will be the crucial determinant for the Federal Reserve about when interest rates should be hiked.
Some will note that oil producer currencies have held up quite well in recent times, but I would take you back to my recent comments about the US dollar… it’s taking a breather. This doesn’t mean however that EUR/USD and GBP/USD might not do their own thing and post new lows in the short term, as I said before, these European currencies are dancing to their own regional tune. When I look at the EUR/USD chart at the moment, it looks to me, like we could get as low as 1.15 – 16 in the weeks ahead, but probably not before we re-test the high 1.19s or possibly 1.20 first. Breather or not, we remain confident that when the bullish dollar trend reasserts itself, currencies like the Russian rouble, Norwegian krone and the naira will be under pressure again. If you have exposures to these currencies, now is not the time to be complacent in my view, this is an opportunity structure the appropriate protections.
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