Euro shrugs off bad economic news out of the eurozone as currencies trade in tight ranges

Tom Tong26/Mar/2012Currency Updates

Currency trading last week was trend less and desultory in world markets. In fact, it had been months since we had seen such low volatility and tight ranges in FX markets. This apathy stands in sharp contrast to the steady flow of negative macroeconomic news. European data goes from bad to worse, as the double dip recession spreads from the periphery to the core; the Chinese economy, though still an engine of worldwide growth, is slowing down faster than expected; oil prices continue to rise, taxing already troubled consumers in the first world. So far, the US economy has managed to avoid the generalised malaise, isolated from world troubles by the small size of its export sector, the absence of misguided austerity policies at the federal level, and the firmly sane policies of its central bankers. For now, FX markets are not reacting to the macroeconomic backdrop, and the Euro continues to trade in the same 1.30 to 1.34 range that has held for some months now.


The biggest news of the week in the UK, the Budget announcement, turned out to be somewhat of a non event. There were no surprises or changes in direction, and it is clear that fiscal policy will continue to be a drag on the British economy at least through 2012. Other macroeconomic news was generally poor. Inflation surprised yet again to the upside, coming in at 3.4% YoY. Although we are far from the 5% peaks of 2010, it is clear that UK inflation will take much longer than expected to return to the 2% target. We are also seeing continued upward pressure from rising energy prices in the UK. Given the ample labor market slack and the lack fo feed through to wages, we expect that the main impact will be to depress consumer spending further. Along these lines, February retail sales disappointed again, and we keep our forecast of flat to slightly negative growth in the first quarter of 2012. The absence of major surprises in the Budget meant that Sterling traded in a narrow range all week, rising slightly against the dollar and dropping a like amount against the Euro.


Last week unloaded yet another batch of depressing economic indicators in the Eurozone. The PMI business sentiment surveys provided a nasty downward surprise, dropping 1.3 points to 47.7, firmly back at contractionary levels. Significantly, the drops were particularly severe in Germany and France. We note that the divergence we had been observing between very negative output data (vehicle sales, retail sales, industrial production) and the somewhat more upbeat PMI sentiment indices is resolving itself in favour of the former: PMIs are now consistent with a relatively mild contraction in GP of around 0.5%, based on a simple regression model. However, given the size of the fiscal adjustment forced on the periphery by Europe’s disastrous austerity policies, we see significant downside risks to that number.


There was a bit of disappointing news from the housing sector last week. Though housing permits and housing starts have been rebounding from their very low post-crisis lows, new home sales have slowed down somewhat. We think this is just a temporary blip, but nevertheless the housing data in the US bears watching carefully. The only other news of note was the weekly jobless claims, which dropped below 350,000 for the first time this cycle, and is consistent with the pick up in job creation in the US. It is comforting that the data as yet show very little impact from the sharp rise in gasoline prices. This leads us to think that we are witnessing a genuine recovery in the US, after several false starts since the bottom of 2009.


Written by Tom Tong

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