In a week which has already seen strong manufacturing PMI’s published for the Eurozone and Japan, a better than expected strong IFO report in Germany, it was heartening to see that Q3 GDP in the United States was stronger than initially thought. The domestic data, coupled with the solid data from some of America’s largest partners will only encourage the Federal Reserve to occupy a hawkish stance on December 16th. An interest rate rise looks more and more likely. However, at this time perhaps the most market impactful data might be the European one. If the surprisingly strong data – suggesting Eurozone business activity is at a 4 year high – persuades the ECB to hesitate before expanding its quantitative easing programme that might result in a more positive dynamic for the euro than the imminence of a rate rise in the US on the dollar. It’s tough to tell, but the key point is that all of a sudden the path of least resistance might not be as obvious as it was. Bigger picture, you have to expect the dollar to continue to appreciate, but as in nature there are no straight lines.
Talking about stronger than expected economic data, the numbers published for Q3 GDP growth in Singapore were 0.5% better than forecast, albeit we’re talking about 1.9% annualised growth which is some distance away from the sort of GDP numbers the city state used to post in the recent past. Perhaps a sign of the maturation of the economy, but never-the-less, Singapore remains a sort of canary economy, because of its open structure. This has to be positive news for the global economy as a whole. Perhaps things really aren’t quite as bad as some would like to believe. Again… this only raises the probability of the Federal Reserve strengthening its resolve to normalise interest rate policy and move on beyond the post Global Financial Crisis era, and the love affair with interest rates at the zero bound.
Elsewhere the Australian dollar received a boost as Glenn Stevens, the RBA governor, suggested that “we should just chill out” when asked if a rate cut was likely next week. His preference is a wait and see approach over the Christmas period, or so it seems. In Nigeria, there is continuing criticism of the currency restrictions imposed by the CBN. The popular view is that the USD/NGN official rate seriously overestimates the value of the naira with black market rates offering a truer idea of valuation, which apparently could be anything from 230 to 270 in the critics’ opinion. In the short term, Nigeria’s import dependence is leading to severe pressures on the domestic economy, but it has been conceded that in the long term the currency restrictions might lead to import substitution effects which would be a positive thing.
The pace of dollar appreciation looks to have accelerated in recent days, but there’s not much to get excited about until we see a decisive break above this month’s highs. I would not be at all surprised to see EUR/USD trading below 1.05 and GBP/USD trading below 1.50 at the close of this year. But the more interesting issue, and one that we will discuss in future blogs, is what is likely to happen to emerging market currencies in the wake of a Federal Reserve hike?
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