·
US
Dollar
– Carry Trade Liquidation Continues to
Drive Market Fluctuations
·
Euro
Slips on Speculation that ECB Will Move to
Neutral
·
Australia and Canada Report
Strong Service Sector
PMI
US Dollar -
It certainly feels like déjà vu as
last week’s trends in the currency market manifest themselves again. When the
markets reopened on Sunday evening, the Japanese Yen resumed its climb against
everything in sight. The dollar
fell victim to Yen strength as it dropped just a hair shy of its 3 month
low. However the dollar’s weakness
was just limited to the Yen as the greenback actually staged an impressive rally
against currencies such as the British pound, Australian and New Zealand
dollars. The market completely
shrugged off the drop in the service sector ISM report despite its deterioration
to a 2003 low. The details of the
report are not as discouraging as the headline with only 5 of the 9 sub-indices
reporting slower growth.
Nonetheless, the service sector is a far bigger contributor to
US growth than the manufacturing
sector. Today’s drop in the
February report negates the improvement that we saw in the manufacturing sector
ISM last week. The data also
indicates that the weakness in the other parts of the economy is hitting the
service sector as well. With
non-farm payrolls due out this Friday, it is important to note that the
employment component of the service sector report picked up in the month of
February; this follows a similar improvement in the manufacturing survey. Many of the large banks are calling for
a far weaker NFP print than the current 100k forecast. Part of that pessimism can be attributed
to the larger number of jobless claims that have reported over the past few
weeks. In the meantime,
contributing to the dollar’s strength today were relatively optimistic comments
from Fed Presidents Warsch and Poole. Both of the Presidents attempted to down
play the recent volatility in the stock markets and talked up the economy’s
resilience. We would not be
surprised to see more Fed officials attempt to pacify the markets, but the Fed
may be forced to cut interest rates sooner rather than later if the Dow does not
stop falling.
Euro –
The Euro
has seen its biggest one day move in over a month on the back of carry trade
liquidation hitting EUR/JPY, weaker service sector PMI and broad dollar
strength. Although service sector
activity accelerated in France and Italy during the month of February, it
deteriorated significantly in Germany, which is the region’s
largest economy. We are beginning
to see the effect of the VAT tax increase on German consumer spending, but with
the regional index still well in expansionary territory, this will not prevent
the European Central Bank from lifting interest rates again later this week.
However it could very well push the central bank back into neutral
territory. With the sharp increases
in volatility throughout the financial markets and the threat of a slowdown in
the US, the ECB may opt to take the
backseat until the markets calm down.
They may not want to exacerbate the slides that we have already seen in
the European markets. Since last
Monday, the German DAX is already down close to 8 percent. The US calendar is very light tomorrow
which leaves Eurozone retail sales and the European Commission’s GDP forecasts
as the market’s primary focus.
Switzerland will be releasing its
fourth quarter GDP report tomorrow.
Strength has been seen in nearly all of Switzerland’s
latest economic reports, which confirms the market’s forecast for stronger
growth.
British Pound –
The British Pound plunged across the
board as carry trade unwinding during the Asian session dragged Cable down
nearly 200 points from Friday’s New
York close. Economic data out of the UK did
little to boost the currency, as PMI services tumbled to a five-month low of
57.4 from 59.2 during the month prior. All of the index components slipped,
including employment, outstanding business, prices charges, and business
expectations. The biggest decline came from new business expectations, which hit
the lowest level since November 2005 and bodes particularly ill for the sector.
The remainder of the week will be relatively quiet, though HBOS house prices,
BRC retail sales, and Nationwide consumer confidence are all estimated to
weaken. The BOE rate announcement on Thursday will likely be a non-event, as the
central bank is expected to leave rates steady and do not normally comment on
their decision until the release of the policy statement later in the month.
Japanese Yen –
The liquidation of Yen crosses continues as the Japanese Yen sees another
day of impressive gains. The
sell-off started as soon as the markets opened in the Asian session on Sunday
evening and was triggered by the sharp increase in capital spending in the
fourth quarter. Strong
profitability in 2006 has provided corporations with the excess capital that
they need to spend in both manufacturing and non-manufacturing investment. The Yen’s rally was further exacerbated
by the revaluation comments from China’s PBoC Governor Zhou. He said that they will be widening the
currency’s trading band, although a time table was not given. The sharp moves that we have seen in the
Yen indicate that there are many factors contributing to the currency’s
rally. This includes repatriation,
carry trade liquidation and speculators stopped out.
Commodity Currencies (CAD, AUD, NZD)
– The
Commodity Currencies are weaker across the board as the high-yielding Australian
dollar and New Zealand dollar continue to feel the wrath of carry trade
unwinding. In fact, Australian data was actually quite bullish for the national
currency while the New
Zealand calendar was empty. The AiG Performance
of Services Index surged to 54.5 from 49.5 – signaling expansion in the sector
for the first time in four months. Meanwhile, the TD Securities Inflation Index
pointed to building price pressures as the figure accelerated 0.2 percent for
the month and 3.4 percent year over year.
In Canada, Ivey PMI surged to a seven
month high of 62.2 from 53.8 during the month prior. A breakdown of the data
shows that nearly all of the components improved, with the employment index
edging back above 50 while the price index jumped to the highest level since
August 2006. With the sector performing well once again and last Friday's
release of Q4 GDP hotter than expected at 1.4%, Canadian expansion appears to be
on a steady track and should keep the Bank of Canada maintaining a neutral bias
at their MPC meeting this week.
