Equity markets are rallying this morning, no doubt the better than expected PMI data from China probably didn’t harm the bullish start. I should qualify the Chinese data by pointing out that it still signals a contraction in manufacturing activity albeit less than forecast. Perhaps less bad news from China is the start of a recovery, certainly the likelihood of monetary easing from the PBOC has grown. It wasn’t just equities that reacted positively this morning, commodities are perky and the Australian dollar is partying like it’s 1999….relatively speaking anyway!
I must confess the price action of cable (GBP/USD) has somewhat surprised me. As you may recall my bigger picture view was that the pound sterling is likely to seriously underperform the euro and the dollar. I did however expect after its recent underperformance a period of recovery which could take GBP/USD up to the 1.53 – 54 level. But the most we have seen so far was a bounce up to 1.5240 before downward pressure returned. It seems increasingly unlikely that the sort of corrective bounce I anticipated will occur. It may well be that cable weakness is here to stay for some time. I for one will assign a lower level of conviction to my currency market views until I can re-grasp the thread of the market. It’s tough out there right now!
Tomorrow, being the first Friday of the month, is of course non-farm payrolls day in the United States. As usual this data will be keenly watched by the market and the Federal Reserve. I would guess that average earnings data will be even more critical than the labour market data at this stage. After all, we have largely seen the US central banks labour market targets met, but they have still not reacted with an interest rate rise. At this stage only the threat of a loss of monetary control is likely to speed up the process of policy normalisation. That will only happen if inflation rears its head.
Looking at some of the commentary from bank strategists at the moment, the view is growing that case for a bearish euro is receding. This view seems to be based on a valuation argument and the signs of economic recovery in the Eurozone. While I have sympathy for the view that the Eurozone economy is starting to do better than might have been expected I am uncertain that the valuation justification is a reason to discard the bigger picture bullish dollar view. In fact I would argue that the better the Eurozone does, the more able the Federal Reserve will be to normalise policy, whereas monetary policy in the Eurozone will have to remain easy for years to come. That to me suggests an environment where the dollar can prosper versus the euro. Time will tell. For now GBP/USD broke the key levels to the downside I was watching, but EUR/USD failed to do the same, which confuses the dollar picture. Perhaps the only conclusion from this is that EUR/GBP looks bullish from here…
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