The US dollar is looking stronger across the board with GBP/USD testing 5 year lows. In front of a ‘too close to call’ general election currency traders are shying away from pound sterling, and as much as any Greek exit concerns continue to trouble the euro, the British pound vies for most disliked amongst the major currencies.
Some terrible trade numbers from China has sharpened focus on the global economy this morning. Year on year exports fell 15% versus forecasts of a 12% rise, and imports fell more than expected as well. It is difficult to avoid the conclusion that all is not well in the Chinese economy at the moment, but this view needs to be tempered by the distortions which tend to arise in Q1 due to the Chinese New Year. Still it would be far too optimistic to just assume that this is all about the New Year, and commodity prices have reacted negatively as should be expected. The Chinese central bank has already cut interest rates twice since late last year in a sign that the government is increasingly concerned about decelerating economic growth.
From a technical perspective, I will stubbornly stick to my cautious mentality where dollar strength is concerned, particularly regarding EUR/USD. There are clear signs of weakening momentum at the moment, even as the single currency edges closer to the mid-March lows. As I’ve mentioned before, I will only gain confidence that the bigger picture trend towards US dollar strength has re-started once we have made a substantial new low. For the sake of clarity, I would suggest a breach to the downside of 1.0350 should be sufficient for me get back on board. As things stand, the momentum profile does not suggest the trend is back in place, and EUR/USD still appears to be trading within the huge channel that has been in place since the global financial crisis back in 2008 (have a look at the blog posted on 26th March 2015 for the illustration).
German 10 year bonds (Bunds) are approaching 0% yields, to be precise they are now yielding 0.16%. Even at the height of Japanese deflation I don’t believe we saw something as extraordinary as this. A whole new branch of economics is being developed on the hoof to accommodate a world where negatively yielding assets are prized by rational investors, what a crazy world we live in! The rush for safety and also for returns are a consequence of the monetary tsunami created by the policies of the ECB and the Bank of Japan. We can look at European equities at record highs, Japanese equities at multi-year highs, and despite the poor macro data from China we have soaring Chinese equity markets and a veritable stampede into Hong Kong equities. Indeed, such is the clamour – from mainland investors – to purchase Hong Kong equities that the monetary authorities there are defending the USD/HKD peg from excessive Hong Kong dollar strength. It is difficult to see any end to this paradigm in the short term, unless the US Federal Reserve tightens policy, but how can that happen if the US dollar continues to strengthen? One possibility would be continuing strong employment data in the United States, or at least stronger wage growth, but this month’s non-farm payrolls have suggested a slowdown in employment growth. Needless to say, the US central bank will have to juggle a lot of moving pieces in order to come to a determination about monetary conditions in the United States. I don’t envy their choices!
One final comment… in the United States, Hillary Clinton has announced her candidacy for Presidency of the United States. It is likely she will contest the elections against Jeb Bush. Another Clinton – Bush battle. Dynastic politics? Who would believe it, if it was fiction?
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