Sharp Friday sell off temporarily halts dollar rally
19/Mar/2012 • Currency Updates•
Last week was relatively light in terms of macroeconomic data or major policy decisions. The trend of the previous week continued, as the dollar rallied against European currencies and asset prices again broke to new highs for the current cycle. On Friday, however, the FX markets suffered a somewhat puzzling reversal. In less than two hours, and with no apparent news to drive the move, the Euro and Sterling rallied more than 1% against the dollar. Most other major currencies followed suit, and in the end the dollar finshed the week down a modest 0.4% in trade-weighted terms.
There were few economic news or policy decisions in the UK last week. Perhaps the most important of these was the release of labour market data, which was consistent with overall stagnation in employment. Modest private sector hiring continues to offset public sector shrinkage. Sterling mostly ignored this news, drifting higher against the Euro earlier in the week, then rallying sharply against the dollar along with all other European currencies in Friday’s puzzling two-hour move, to end the week up a bit over 1% against the greenback and about half that much against the common currency. All eyes shift to the critical Budget announcement on Wednesday.
Again, not much news of any importance out of the Eurozone last week. Perhaps the most striking release was new car sales across the Eurozone. They did not recover from their extremely depressed January levels. While flat in YoY terms in Germany, the declines elsewhere put the overall figure at -11.8% from last February, even though there was an extra day in this one. Italian car sales are now back to 1985 levels. It is clear to us that consumer demand is not going to drive economic growth any time soon, and therefore we see exports to the rest of the world as the only way out of the Euro crisis. For that, the Euro needs to be much lower, thus we maintain a bearish view of the common currency.
There were two important releases in the US last week. Industrial production data showed that the manufacturing recovery in the US is gathering strength. If the current trend continues, in the first quarter of 2012 IP will increase by about 10% in annualized terms. This revival of manufacturing, together with indications of some increase in housing starts and reasonable growth in consumer demands should keep US growth somewhere north of 2% for the remaining of 2012 unless the Eurocrisis starts seriously denting US business confidence, which has not happened so far. This is a relatively good performance, and therefore we continue to be fairly bullish on the US dollar.