Challenges For EUR, USD And GBP

With some data to react to, currency markets yesterday had their most volatile day this week with the euro, US dollar and Aussie dollar all facing their own challenges.

Euro weakened following a Eurozone industrial production number that dropped unexpectedly in October. Production managed a 1.1% fall compared to September, putting the year on year figure only 0.2% higher. Domestic and export facing demand has been low for months now and shows that from an industrial production point of view, GDP in Q4 is likely running below zero. PMIs have shown some optimism in these sectors however, so we would hope that November’s and December’s numbers are stronger.

US initial jobless claims disappointed heavily in the week ending December 7th. Last week’s 298,000 reading was the first below the 300k mark since the government shutdown and showed that strength has returned to the US jobs market quicker than most had anticipated. This may have been nixed by today’s 368k increase – the highest since the first week in October.

We also received US retail sales which rose 0.7% in November. These were for the month of November, obviously including the important “Black Friday” and “Cyber Monday” shopping days that will give retailers momentum into the Christmas holidays. Today’s number beat expectations of 0.6%. The market decided to focus on the retail sales figure, strengthening the USD as a result. We think that this may have been as a result of market participants viewing recent jobs numbers as unusable in light of such extravagant swings.

Aussie dollar has been unable to catch a break this year and is ending the year with the downward momentum of a falling rock. Following a disappointing jobs number, Governor Stevens, chair of the Reserve bank of Australia decided now was the time to emphasise to the market that he believed AUDUSD should be trading towards 0.85c. This took the pair through the 0.90c level and GBPAUD above 1.82. We are looking for a structurally weaker AUD through 2014 via lower rates; Stevens’ jawboning only increases the velocity of the fall.

Today’s data calendar is once again on the quiet side but we would look out for further detail on the recovery of the UK’s construction sector when the ONS releases its Construction Output numbers at 09.30. We doubt that the very bullish PMIs are misleading the market however and expect a strong number.