FX Commentary - October 10, 2017
The US dollar rolled into the fourth quarter with one of its strongest weeks in the year. New details on the long promised tax cuts from the GOP and a show of conviction on the path of rate hikes from the Federal Reserve has turned sentiment in favor of the dollar while political destabilization across Europe has weighed on the pound and euro.
Recent economic data out of the US has been difficult to estimate given the impact of the recent hurricanes. Nonetheless, releases last week showed encouraging signs for the world’s largest economy heading into the fourth quarter. The ISM manufacturing index accelerated to a 13-year best while the non-manufacturing index reached a 3-year high, both suggesting strong business activity. Leading up to Friday, jobless claims and private ADP employment numbers had markets looking forward to a positive jobs report. However the economy lost 33,000 jobs in September marking the first monthly decline in seven years. Even more surprising were the other components of the report, namely unemployment and earnings. Unemployment fell to 4.2%, the lowest since 2001 while average hourly earnings spiked to 0.5%, pulling the yearly rate to 2.9% with August wage numbers also revised upwards. The Fed has been concerned over the absence of real wage inflation so this report comes as welcome and relief and re-enforces the view that the Fed will hike in Dec. This Friday will have markets carefully waiting to see if consumer prices and spending follow the increase in wages. Fed minutes are also due this Wednesday, but recent wage data should help offset any inflation concerns present in the transcripts. Any surprise shocks to the dollar may originate politically, as Donald Trump’s latest “calm before the storm” certainly suggests something to come.Political turmoil is rife in Europe with the heart of the drama being Catalonia, the northeastern region of Spain which currently seeks independence. In defiance to the central government and constitution, the region put to ballot an independence referendum, eliciting an authoritarian response from Spanish police which drew worldwide attention. At stake is the region’s 20% contribution to Spanish GDP. Moreover, this latest series of events follows Germany’s recent elections, where far-right candidates won a substantive amount of seats in parliament and have complicated Angela Merkel’s agenda in forming a coalition. While the Eurozone operates as a monetary and not political union—making it theoretically possible for a newly independent state to retain the currency and its privileges—the very foundation and by extension value of the euro lies in cooperation and unity amongst the states, making the current state of affairs a high risk for the single currency. As a result, expect to see the euro trading largely on political developments through the week with economic data in the periphery. Across the channel, political uncertainties surrounding Prime Minister Theresa May and Brexit have weighed on the pound while mixed data have tempered expectations of a rate increase. Just two weeks removed from sterling’s best week of the year when Bank of England officials communicated the possibility of raising rates, the pound endured its worst week of the year, falling to one month lows. A set of PMI’s this week showed mixed results, with manufacturing and construction down but the more important services sector up. Unless recent data proves transitory, markets are now seeing a more limited scope for the Bank of England to raise rates. There are no market moving indicators for the UK this week, but a host of releases next week led by consumer prices will be crucial in the rates discussion. For now the pound remains largely tied to Theresa May’s fate which appears increasingly dire. After delivering a largely ill-fated speech at the Conservative Party conference, May failed to reenergize her support and even faced calls for her resignation. Until resolved the ongoing instability at 10 Downing Street will stall any progress towards Brexit and remains an open risk for the pound.
Sources:www.wsj.com www.econtoday.com https://continuumeconomics.com www.investmentbank.barclays.com/research/barclays-live.html
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