The evidence of a mid-cycle dip in global activity is becoming overwhelming, just this week we’ve seen sentiment and activity data in the UK, Eurozone, Germany, Spain, Canada and the United States all failing to meet economist expectations. And don’t forget the disappointing non-farm payrolls labour market data published in the U.S at the end of last week. Weeks ago we observed the poor data coming out of East Asia and it seems the wave has had sufficient power to now be washing against western shores. In my view there is nothing in the data to suggest any more than a mid-cycle dip, there certainly doesn’t appear to be anything systemic that should exercise us at this point. Truth be told we have often seen periods like this in global expansions, so I would expect that global activity will accelerate again in the months ahead. If it doesn’t then we are certainly in a bad spot, as I’ve mentioned several times, major central banks are all operating around the zero bound for interest rates so any crisis would have to be dealt with by extraordinary monetary policy. At that point, about the only thing worth holding would be gold! But as I’ve said I don’t think this is what is happening. Still it would be remiss of me not to point out that the IMF, just this week, published a report forecasting that global growth this year would be the slowest it’s been since the financial crisis. The primary culprit seems to be weaker commodity prices and higher debt levels in some of the major emerging market economies, and China of course.
What does this all mean for currencies? I would suggest that most of this is already being discounted in the currency markets. Emerging market currencies have been under severe pressure for the last few months after all, with some as weak as at any time for many years. Furthermore the Federal Reserve’s hesitation has slowed the ascent of the greenback and could continue to do so. Relative performance is likely to be guided by the relative economic performance of the various economies. This could bode well for the euro, think of it this way.. everyone is used to hearing bad things about the Eurozone economy, and so disappointments in the United States and United Kingdom will have a disproportionately bigger impact. As I mentioned earlier on in this post, I don’t see this as anything more than a mid-cycle dip, thus at some point the economies leading the cycle – UK & US – are likely to pick up steam and put rate normalisation firmly back on the agenda.
From a technical point of view, it appears that GBP/USD is rather belatedly doing what I expected weeks ago. As I said then a recovery to the 1.53 – 54 level was feasible, but I still remain bearish the pound sterling. I continue to expect EUR/GBP to trend higher, and GBP/USD to trend lower, but a counter-trend move in either case looks likely before my bigger picture view is fulfilled. For now, major assets appeared to be in a counter-trend situation with equities rallying somewhat, but it really does look as if we’ll see another leg lower before all is said and done. Perhaps this would fit in with a continuing paradigm of weaker equities = weaker dollar. Once that is done, the big dollar rally and the equity bull market should re-assert…
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