EUR: Looking for Stronger IFO
USD/JPY Makes another Run for 90
AUD Collapses after 1.05 is given
USD/CAD above Parity
NZD: Shrugs Off Stronger Data
The British pound fell to 4 month lows against the U.S. dollar and 10 months lows against the euro ahead of the U.K.’s fourth quarter GDP numbers. At a time when German economic activity is surprising to the upside, the challenges in the U.K. economy are becoming ever more apparent. The reduction in sovereign risk in the Eurozone will hurt the GBP by encouraging European investors to shift their funds back into euros. Deterioration in U.K. economic data has now increased their desire and urgency. According to the Confederation of British Industry, retail sales weakened further in the month of January. Consumers in the U.K. are being extremely frugal and this will not bode well for the U.K. economy. At the end of last year, U.K. consumer spending did not increase at all between October and December and this weakness in consumption is the main reason why GDP growth is expected to contract in the fourth quarter. Economists are only looking for a 0.1% decline – we think that the decline in growth could be much steeper and if we are right, the GBP would experience further losses. The U.K. economy is in trouble and if there is no growth in the first quarter of 2013, the U.K. would be poised for a “triple-dip” recession.
The euro ended the day higher against the U.S. dollar but not before some wild intraday swings. According to the PMI numbers, Eurozone manufacturing and service sector activity improved in the month of January but the increase was driven largely by the strong performance of Germany because the contraction in service and manufacturing activity in France deepened. The French flash PMI readings badly missed their mark printing at 42.9 versus 44.9 eyed for the Manufacturing sector and 43.6 versus 45.6 for the services sector. The German data however saw a strong improvement as Manufacturing rose to 48.8 from 47.1 while services jumped to 55.2 well above the 50 boom/bust line. The very weak reading out France suggests that President Hollande’s policies of social redistribution are wreaking havoc on the country’s business climate and may result in GDP contraction for Eurozone second largest economy. Still economic activity may recover as Hollande steps back from some of his more radical proposals and broader demand from Europe revives French industry. The Germans on the other hand continue to fire on all engines with Manufacturing PMI now within a whisker of the 50 expansion line and Europe’s largest economy could act a locomotive for the rest of the region. The broader EZ PMI data shows that the recovery in periphery economies may offset the decline in French production and suggests that the region is starting to generate some positive momentum for growth. Given the rise in German PMIs and the increase in investor confidence, a forecasted stronger German IFO report today that could help drive the EUR/USD above its range high of 1.34.
U.S. jobless claims report, which was the best in 5 years, USD/JPY appears to gunning for 90, again. While the data shows that the economy and labour market are improving, the impact on currencies has been limited because the correlation between jobless claims and non-farm payrolls have weakened over the past years. Investors are not convinced that fewer firings will translate into more hiring. Jobless claims dropped to 330K from 335K in the week ending on January 19th. Continuing claims also fell to 3.157 million from 3.228 million. Scepticism about the accuracy of the data limited the positive impact on USD/JPY. For the second week in a row, the Labour Department credited the improvement to seasonal factors. A spokesman pointed out that the data is following patterns seen in prior years where claims dropped significantly for a few consecutive weeks in early January only to rebound at the end of the month. More than 365k people also lost their extended unemployment benefits but that too could be distorted by seasonal factors. So while this month’s jobless claims report was a killer, it is hard to believe that this improvement will stick especially with the increase in the payroll tax this month. Nonetheless non-farm payrolls are due for release next week and based on the jobless claims report and other measures, BK Asset Management expect another month of strong job growth.
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