Weekly Treasury Update
Dollar
Following the weaker than expected employment data, there has continued to be a more cautious tone surrounding US growth prospects. There will also be expectations that a tighter fiscal policy will have some negative impact on spending. In this environment, there have been fresh doubts surrounding the potential for a tapering of Federal Reserve bond purchases.
There will still be expectations that the US economy will out-perform compared with the eurozone. The relative outlook will, therefore, continue to provide underlying support for the US currency with a lack of viable alternatives. The dollar will also gain some support if there is any fresh deterioration in international risk appetite.
The dollar weakened against European currencies during the week with further doubts surrounding the US outlook as the Euro pushed to monthly highs. The latest US employment report was weaker than expected with a headline non-farm payroll increase of 88,000 for March, the lowest gain for nine months, after a revised 268,000 gain for February. Markets had been braced for a relatively weak release following the weaker than expected readings for ADP and the ISM employment index. There was still disappointment that growth was below 100,000.
There was some relief that the unemployment rate declined to 7.6% from 7.7%, although this primarily reflected a decline in the participation rate.
Following an inadvertent leak of the Federal Reserve minutes, the report was released five hours ahead of the scheduled release time. There was inevitably a mixed set of opinions within the FOMC. One member, presumably Kansas City President Esther George wanted an immediate tapering of bond purchases. A few members were looking for a reduction in asset purchases by mid year with other expecting action to delay until next year.
The minutes did have a slightly more hawkish tone, but the impact was certainly lessened by the fact that expectations may have shifted again following the weaker than expected payroll data last week.
Jobless claims data recorded a decline to 346,000 in the latest week from a revised 388,000 previously which offered some degree of reassurance surrounding the labour market and helped stabilise sentiment towards the economy.
Regional Fed President Charles Plosser again called for a reduction in bond purchases by mid 2014 given the recent economic improvement. Plosser, however, remains a non-voter for 2013 and the overall re-assessment following the Fed minutes which suggested that the Fed was unlikely to shift policy in the short-term.
The latest retail sales and consumer confidence data will be watched very closely on Friday for further evidence of underlying trends and a weak outcome would further dampen confidence.
Euro
There will be further concerns surrounding the eurozone outlook after the stream of negative data releases and fresh deterioration in growth prospects. There will be severe concerns surrounding the peripheral outlook and the social costs of rising unemployment are also liable to intensify as political protests increase. There will be strong pressure for additional European Central Bank support in the form of monetary relaxation, although there is widespread scepticism whether interest rate cuts will be effective. Underling capital inflows are also liable to be generally weaker given fresh peripheral fears.
The euro was able to maintain a solid tone during the week with advances against all major pairs, although ranges were relatively narrow. There was a significant development in eurozone bond yields as German yields fell to the lowest level for eight months. There was also a further sharp decline in French yields as benchmark yields declined to record lows.
The eurozone Sentix business confidence index declined to -17.3 for April from -10.6 previously with the index at its lowest level since December.
Portugal remained a significant focus following the ruling that part of the government’s budget cuts were unconstitutional. The government will look to find alternative measures to cover an expected gap of around 0.8% of GDP. There will be increasing domestic opposition and it’s certainly possible that the government could collapse and trigger further instability.
Spanish Prime Minister Mariano Rajoy stated that the ECB mandate should be altered by the EU. He effectively called for a switch towards a Federal Reserve type mandate which would require employment to be targeted as well as inflation. There is little doubt that Spain will continue to push for a looser monetary policy and there could be a significant impact if political momentum builds.
The EU Commission warned that Spain and Slovenia both needed to take urgent action on budgets. There was important underlying unease surrounding the peripheral economies and lack of policy flexibility. Moody’s warned that underlying deterioration in government finances could trigger a credit-rating downgrade. ECB council member Jorg Asmussen stated that there were more downside risks to the economy then there were 1-2 months ago which will maintain pressure for the ECB to take a more aggressive action to stimulate the economy even with doubts whether there would be a significant impact on the economy.
Range for previous week: $1.2967–$1.3138
Range for this week: $1.2900–$1.3130
Sterling
The latest UK survey data will provide some relief over the likelihood of avoiding a triple-dip recession with marginal growth likely to be registered for the first quarter of 2013. The overall growth dynamics remains very poor with little scope for domestic gains and generally weak export prospects. In this environment, there will still be pressure for the Bank of England to sanction additional quantitative easing and provide a boost.
There will also be further concerns surrounding the underlying balance of payments situation. Overall, sterling will find it difficult to correct higher significantly further. Sterling held a firm tone against the dollar during the week and pushed to the highest level since early March with consolidation near 0.85 against the euro.
The latest industrial production data was stronger than expected with a 1.0% increase for February, although this failed to recover the 1.3% decline recorded for January.
The NIESR (National Institute of Economic and Social Research) data registered 0.1% growth in the three months to March, unchanged from a revised estimate for the previous month. The data maintained expectations that the UK economy would just be able to avoid a triple-dip recession.
The trade data was weaker than expected with a goods deficit of £9.4bn for February from £8.2bn the previous month, which maintained a high degree of unease surrounding the export sector and wider balance of payments deficit.
BoE Monetary Policy Committee member David Miles remained uneasy over the growth outlook and expected inflation to retreat with his comments still suggesting that he will favour further quantitative easing. He has been promoting further bond buying consistently over the past few months and comments from swing members will be more important.
Range for previous week: $1.5250–$1.5411
Range for this week: $1.5290–$1.5450
Yen
The Bank of Japan will continue to push for an extremely aggressive monetary policy in the short-term as it looks to double the monetary base in order to boost inflation. The policy will remain a substantial negative factor for the yen. There will also be expectations of strong capital outflows given the heavy BoJ buying of domestic bonds. This will tend to weaken the yen, although overall capital flows are still likely to be highly erratic. Yen volatility is also likely to be a key feature.
On Monday, there were reports that the BoJ would accelerate its bond buying programme with the purchase of ¥1.2trn in bonds of purchases of above 5 years. In this environment, the yen was subjected to further aggressive selling pressure despite pressure for a limited correction.
Underlying yen sentiment remained extremely weak following the aggressive BoJ policy shift and bond purchases. There was further speculation over the extent and destination of Japanese institutional funds given that there will be very little scope for domestic bond purchases given the aggressive BoJ intervention.
BoJ chairman Kuroda stated that the bank would be relentless in the determination to meet the 2% inflation goal. In this context, the policy of aggressive bond buying could be extended beyond two years. Comments that policy action was enough for now and that policy was not directly aimed at exchange rates triggered a yen correction.
Although machinery orders rose 7.5% for March, there was a sharp annual decline which maintained unease surrounding the industrial outlook. There was strong yen selling on any corrective yen rebounds, but there was option defence of the 100 region which provided some degree of protection.
Range for previous week: ¥98.09–¥99.94
Range for this week: ¥98.10–¥100.10