Currency market volatility has continued its recent increase in the past 24 hours as the data picture from the world economy continues to surprise. Yesterday’s legal issues in the Eurozone were swiftly forgotten about following a poor retail sales announcement from the United States that took the wind out of the USD’s sails.
Yesterday’s European Court of Justice decision on whether the European Central Bank had overstepped its mandate in creating their OMT bond purchasing program went exactly as most had hoped. The ECB stimulus was ruled as ‘broadly legal’ necessitating few changes to become completely legal in the coming six months or so. As most of the market had expected and hoped, this will not provide a reason to stay the ECB’s hand on additional stimulus at their next policy meeting a week today.
With this hurdle eliminated, euro slipped to fresh nine year lows against the USD and six year lows against sterling. There are a multitude of reasons to expect the euro to maintain its weak run in the coming months; EUR/USD bears are focusing on 1.1640 – the low seen in 2005 when France rejected parts of the EU constitution – while the next stop for GBP/EUR is most definitely 1.30.
I think that we may see these numbers in the lead-up to next week’s policy meeting. Traders are more than happy to ‘buy the rumour and sell the fact’ i.e. sell the euro in anticipation of additional stimulus from the European Central Bank and then buy it back once the numbers are announced. Tomorrow’s second reading of Eurozone inflation may also provide traders another opportunity to express their view of a weaker single currency.
It was the USD however that weakened the most yesterday as retail sales in December disappointed heavily. Markets had been looking for a decline of 0.1% but were instead faced with a 0.9% fall. While we have seen consumer confidence and comfort measures remain strong in the US and disposable income increase as ‘gas’ prices have fallen, this is not translating into stronger sales. This once again links back to the poor wage numbers that we saw in last week’s payrolls announcement. With wages slipping by the most in a month since 2006, it is clear that American consumers are saving any additional cash left at the end of the month and not blowing it in Walmart, Macy’s or JC Penney.
This reaction should ease as more jobs are created and the labour market tightens further, driving wages higher, but for now the US consumer remains firmly sat on its hands. USD slumped in the aftermath and US bonds were bought heavily as investors looked for a haven from a sharp sell-off in stocks. The announcement rattled rate expectations as well. The Eurodollar contract – different from EUR/USD – for Dec 2016 has fallen to 1.38% from 1.53% i.e. the market is now expecting rates will only be 1.38% in the US in December 2016 compared to the 1.53% they were looking for before the announcement.
Last night’s Beige book announcement from the regional Federal Reserves added little to the argument; consumer spending remains strong however wage pressures are largely ‘limited to workers with specialised technical skills’.
Overnight the AUD has run higher on both local data and the weaker USD. Australia’s latest jobs report showed an unexpected decline in the jobless rate to 6.1% and a 37,400 person increase in unemployment. We have seen similar strong numbers last only a month in the past but should we see a continuation in the coming months then we might be less reticent in calling for additional AUD strength through the rest of 2015.
Sterling has remained quiet overnight, although The Royal Institute of Chartered Surveyors’ latest survey on UK house prices has shown that the largest amount of chartered surveyors since May 2013 are seeing house prices decline.
Today’s calendar is mostly US focused with the first ‘clean’ jobless claims figure – one not affected by the festive period – due at 13.30, alongside the latest producer price data that will likely see falls in factory gate inflation as companies react to lower commodity prices.
