Currency Market Analysis

May 13, 2015 | Currency Market Analysis

Global Themes

The sell-off in bond markets abated in late European trade yesterday which supported the recovery in the Euro against the US Dollar. German 10-year yields are down 11 bps from its high of 0.77 traded on the May 7. US 10-year yields were down lesser and the narrowing of yield difference supported the Euro pushing it higher. German CPI increased 0.5 percent which was slightly higher than expected raising doubts about continued deflationary pressures in Eurozone which has been the key driver for pushing yields & also the Euro lower. There was another weak data point from the US labor market as job openings reported by the Bureau of Labor Statistics was lower than expected dipping in April 3 percent lower to post the first negative number since October last year. The Euro was also supported by Q1 GDP which increased 0.4 percent (Q-on-Q) though this was marginally lower than expected it is above the growth posted by US in Q1. German GDP growth at 0.3 percent put the drag on the overall EU number. France posted strong growth at 0.6 percent which is the highest since Q1 2011. The commodity currencies were boosted by rising oil prices and weaker than expected economic data from China, which increases chances of stimulus. Crude Oil prices hit the highest level in 2015 as EIA forecasted that output from seven major shale oil companies will decrease by 86,000 barrels a day in June. The renewed conflict in Yemen increased “geopolitical risks” which also pushed oil prices higher.


Overall Eurozone GDP was slightly below par due to the largest economy Germany underperforming. Italy was another large economy which showed strong performance posting GDP growth of 0.3 percent well above the flat reading of zero Q4 2014. Greece will continue to underpin the Euro as it has about Euro 1.5 billion of loans to repay before the end of June and there were rumors that the Greek government has only about Euro 90 million in cash reserves currently. European factories seem to be slowly coming back to work as Industrial Production posted strong growth of 1.8 percent(Y-on-Y) for the second consecutive month in March. The number for February was revised higher to 1.9 percent from 1.6 percent reported earlier. Overall there is buoyancy in Eurozone economic data which has not been seen for a long time and the key reasons for this are a weak euro, low crude oil prices & ECB’s monetary stimulus.


The Canadian Dollar strengthened against most currencies on the back of the rally in crude oil prices. Crude Oil prices at the highest level in 2015 should support Canadian Oil Sands output, which has very high capital costs but marginal costs are relatively lower and this surge higher in prices should support a pick-up in output in the short term. The Canadian Dollar was also impacted by a Bloomberg report which implied that Bank of Canada could move the inflation target higher from 2 percent. This would mean that Bank of Canada could get more space to manage interest rates as the weak Canadian Dollar pushes inflation higher and with low growth there is no space to increase rates.


The Pound Sterling gave back some of the gains from the last few days after Bank of England cut its forecast for British economic growth for 2015 to 2.4 percent from 2.9 percent. It was the fastest growing G7 economy last year and even after this cut it could be higher than most others. As per Bank of England the cut in growth estimates was due to a weaker outlook for house building and productivity and a stronger currency. BOE also expects inflation to move to its target level of 2 percent in two years from its current level of zero. Inflation is expected to pick up later this year and the MPC expects the falls in commodity prices to be relatively short lived and therefore looks through them for setting policy. In UK there are some signs of wage push inflation as Average hourly earnings increased by 2.2 percent which is the highest since in the expansionary phase post the recession. The unemployment rate dipped lower to 5.5 percent which combined with higher wages and low inflation should increase purchasing power. The only concern is that the BOE has stated that the jobs being created are the wrong type of jobs, with more low-skilled, low paid employment rather than skilled roles.


Chinese economic data was again very weak today with industrial production for April lower at 5.9 percent being below economist expectations. Fixed asset investment was lower at 12.0 percent well below 13.5 percent. Retail Sales growth at 10 percent (Y-on-Y) was at the lowest since the financial crisis. Chinese economic data has been below par especially over the last few months raising expectations that the Chinese Government could launch another stimulus plan. The Chinese Central Bank cut interest rates for the third time in 6 months earlier this week to loosen monetary policy further. China has also witnessed capital outflows with an official report showing that foreign exchange reserves plummeted by $113 billion in Q1 2015. The woes which started with the collapse in the shadow banking crisis and a slowdown in its large real estate sector has become much broader based now.

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