Full confession, the British pound continues to confuse me. Normally after data disappointment, particularly in an environment where GBP is heavily owned, it falls and continues to fall. This has not been the case this week. Sure we can say that the GDP data which came out yesterday was in line, and this news would have settled some of the concerns of those who are betting on imminent rate rises. This is a justification, but at the end of the day, all we saw was that the numbers were in line. I might speculate and suggest that the provisional Q2 GDP data is likely to be revised higher at the next update, this would not be unusual in a situation where growth in Britain is strong, any further updates are likely to reveal upward revisions, and this is probably the case. The market is betting that both the UK and the US have had enough of rates at the zero bound, and anything short of disastrous data will result in hiking sooner rather than later. Let’s go with that view for now, as nothing else explains the recent price action.
Interesting to read in the Financial Times that Nissan’s earning have been boosted by strong demand in Europe. For those who see the crisis in Greece, and indeed the poor fiscal situation in any number of Eurozone constituent countries as evidence of stagnant growth in Europe, perhaps a revision of that simplistic view is in order. Frankly I was a bit taken aback. Perhaps those fiscal deficits are helping to boost demand? It’s always difficult to arrive at conclusions with one data point, it could just as easily be that Nissan is succeeding on the back of the recalls that have hit both Toyota and Honda in recent times, after all Nissan has now overtaken Toyota as the top selling Asian brand in Europe. But the truth is probably somewhere in between, as car sales in Europe are as strong as they’ve been since 2009. The tougher regions at present are in the BRIC countries China, Brazil and Russia – no surprise there. This does nothing to alter our view about where the euro should go from here. There is virtually no chance of tightening monetary policy in the Eurozone for the foreseeable future, while as we’ve already discussed central bankers in the UK and US are looking the other way. It is on that basis that we remain bullish on the pound and dollar. But more so the dollar, as it is hard to imagine GBP appreciation not being curtailed by its behemoth trading partner – the euro.
Weakening demand situations in Brazil, China and Russia are nothing new, and the horrific falls in commodity prices have compounded this, and will continue to inform our view that Emerging market currencies are in for some tough times ahead. As I mentioned in yesterday’s blog, oil prices are testing recent lows, indeed Brent is down almost 1% as I write. This will inevitably feedback on resource rich currencies, and looking at the Russian rouble we can already see the depreciation trend. We expect this will only get worse as the clamour for rate rises in the United States gathers pace.
Today we get some housing data in the United States, and later on the announcement at the conclusion of the FOMC meeting. Economists are not expecting rate rises this time around, but anything can happen, we are that close now. Perhaps the data has not been compelling enough yet, perhaps there is still some caution ahead of the Greek debt renegotiations, but sooner rather than later, we should see the first interest rate rises since 2007. It is time to start considering what is likely to happen afterwards. I wouldn’t be shocked to see some of the dollar longs taken off in the wake of such a decision, perhaps after an initial spike higher in the dollar, depending, of course, on how surprised the market is, but then the trend will continue, we strongly believe that the bullish dollar trend is here to stay, not just for months, but for the next few years, and we may not even be half way to where this trend will take us. Buckle up, it’s going to be a long ride!
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