Dealer Comment Weekly
The Dealer Comment weekly is published in the Sunday Business Post 'Money & Markets'
Author: Vincent Killeen, Senior Manager, Institutional Sales Team
Bad News is good news
Published 22nd July 2012
The slowdown in the U.S economy gathered pace this week after key economic releases showed the US soft patch is threatening to become more serious. Manufacturing activity in the Philadelphia region contracted in July for a third month; sales of existing US homes fell to their lowest level in eight months; and weekly jobless claims surged to a 3 month high at 385,000. Consumer spending and business investment remains weak and with the unemployment rate stubbornly above 8% pressure is building on Fed Chairman Ben Bernanke to deliver another round of quantitative easing.
The softening US economy coupled with a slowdown in China and a Eurozone economy in recession did little to dent the demand for risk assets. Fed Chairman Bernanke’s commented that the Fed “ was watching the labour market closely and would take additional action to spur the recovery if needed’’, led to a rebound in risk supporting equities; gold; oil and commodity related currencies such as the Australian and Canadian dollar. The Euro, however, was unable to benefit from the risk rally and it now appears to have de-coupled from ‘risk’.
The long standing relationship of higher equities and a higher EUR/USD has broken down. Over the last month the Euro has fallen by 4% against the dollar while the S&P has rallied 5% from its June lows. The recent decision by the ECB to cut deposit rates to zero has led to the Euro becoming a funding currency. This has resulted in investors shorting Euro-crosses (EUR/AUD; EURCAD) on positive news leading to selling pressure in EUR/USD.
EUR/USD is in a clear downtrend and while it has stabilised above its recent low at $1.2160 it is unlikely to make too much headway above $1.2400.
Sterling once again put in a new low for 2012 trading to 0.7790. Sterling appears immune to a weak domestic economy and continues to receive support by not being part of the single currency. EUR/GBP is oversold at current levels and it would not be a surprise to see a move back to 0.7880 next week. Overall we like a lower EUR/GBP and once below 0.7950 we feel a test of 0.7680 is possible over the summer.