Andrew Robinson, FX Analyst
Market Comments:
US data continued to surprise to the upside overnight with the ISM manufacturing number for December coming in at a strong 55.9 versus 53.6 previously (though not as strong as the rumoured 65.0 just before the release!) and against a forecast of 54.3. This marked a new cycle high and some components confirmed this with a fresh high also noted in new orders and a widening in the gap between orders and inventories. On the whole a solid report which should have triggered firmer US yields and a firmer USD. On the flip side, November construction spending was marginally worse than expected (-0.6% m/m vs. -0.5%) and came on the back of a 0.5% downward revision to October’s data.
US data continued to surprise to the upside overnight with the ISM manufacturing number for December coming in at a strong 55.9 versus 53.6 previously (though not as strong as the rumoured 65.0 just before the release!) and against a forecast of 54.3. This marked a new cycle high and some components confirmed this with a fresh high also noted in new orders and a widening in the gap between orders and inventories. On the whole a solid report which should have triggered firmer US yields and a firmer USD. On the flip side, November construction spending was marginally worse than expected (-0.6% m/m vs. -0.5%) and came on the back of a 0.5% downward revision to October’s data.
US yields were undeterred by the stronger data, easing off on the back of some less-than-hawkish comments from Fed speakers Bernanke, Kohn and Duke. Bernanke’s comments were earlier in the session where he refused to lay the blame for the housing crash on low interest rates, instead saying regulation came “too late” to curb the housing bubble. Kohn cautioned that the US economy and job market would rebound only gradually due to ongoing constraints in lending and as a result inflation would remain contained for some time. Fed Governor Duke also commented on the jobless rate, saying it is likely to remain high despite moderate output growth this year. She agreed with Kohn that it makes for subdued inflation and as a result an extended period of low rates was likely.
A more cautious outlook was advocated by Harvard and NBER economist Martin Feldstein when he told a gathering of economists in Atlanta that "There is a significant risk the economy could run out of steam sometime in 2010." This echoes comments made recently by Nobel laureates Stiglitz and Krugman who have recently noted significant risk of renewed recession. Krugman refreshed that concern in yesterday’s NYT, warning against repeating the policy errors of 1937, when stimulus was removed before private activity could sustain growth.
The UK also saw some better than expected data yesterday with manufacturing PMI screaming higher to 54.1 in December from 51.8 in November, back to levels last seen end-2007. Mortgage approvals were also stronger than expected yet GBP failed to make headway across the board and remained a laggard against its peers throughout the session. UK think-tank the Institute of Directors argued there is a significant risk of a double dip or even a 'triple-tumble' scenario for the UK economy. The think-tank predicts an L-shaped recovery with very weak q/q growth in 2010-11, +0.5% GDP for 2010 as a whole and 1.5% in 2011. This is significantly below the consensus estimates of 1.1% & 2.0% respectively and well below the Bank of England’s more optimistic outlook. The IOD adds that de-leveraging and debt reduction are the main priorities for consumers and corporates alike and until this balance sheet adjustment has had time to unwind a sustainable recovery will be unlikely for the foreseeable future. Meanwhile, the British Chamber of Commerce released its December projections and forecast that the economy would expand by 1% in 2010 and 2.3% in 2011. Separately, the CBI sees 1.2% growth in 2010 and 2.5% for 2011.
With the USD in retreat and risk currencies in demand during the European and US sessions, Asia took over the mantle and took rates to fresh levels, though not quite with the gusto seen elsewhere. The exception being the JPY which benefitted from a lack of follow-through USDJPY buying after the Tokyo fix. This dragged JPY crosses lower in contrast to the trends we have seen in risk appetite sessions. The sliding dollar put additional upward pressure on EM currencies and we saw active intervention in local markets by numerous Asian central banks, including the BOK, Bank Indonesia, Taiwan etc. GBP remained a major underperformer in Asia .
The data calendar into Europe features German unemployment, UK PMI Construction and Euro-zone CPI. The North American session sees Canada industrial and raw product prices while US factory orders and pending home sales complete the releases.
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