Dollar is driving higher this morning, pushing the Japanese yen and the euro to six year and 14 month lows respectively. The overall strength of the greenback is being seen in all crosses including GBPUSD, which is currently sat just below the 1.61 level for the first time since November of last year. US yields are starting to support the US dollar as they are driven higher by further and more concrete belief that the interest rate differential between the United States and the rest of the world will continue to sit in the dollar’s favour. We cannot expect a Federal Reserve rate hike for at least nine months in our eyes but the more and more a shift in the curves towards the present are priced in, the more attractive the USD looks.
Yen took a knock yesterday night as comments from the Abe administration echoed a desire for a weaker currency so as to help the economy. “The weak yen benefits the economy by increasing corporate profits, capital spending, employment and tax revenues even if it hasn’t boosted exports,” said Koichi Hamada, and the yen has slumped in response. Bank of Japan Governor Kuroda last week told reporters that he would not be surprised if the yen fell against the USD. This is exactly the kind of verbal intervention that will net some yen weakness in the short term but will be snatched back should the markets believe that there is any vacillation on the part of the Bank of Japan to introduce additional stimulus into the economy.
Sterling has maintained its slide overnight following Sunday’s Yougov poll that showed a clear lead for the ‘Yes’ camp in the Scottish referendum debate. Today’s latest poll by TNS has shown a much more evenly balanced picture with ‘Yes’ taking 38% of the vote, 39% going to the ‘No’ camp and the remaining 23% very much undecided. This helps nobody in the meantime and certainly doesn’t help the pound. A “Yes” vote at the referendum next Thursday would be a strong catalyst for additional pound weakness; the recent moves have by no means priced in independence. Options volume in sterling pairs was the second highest in three months according to market clearing houses. It seems that nobody wants to be caught without a hedge should Salmond et al triumph.
The USD strength is likely to remain until the end of the week. Thursday’s initial jobless claims and Friday’s retail sales report are the most important releases of the week.
Friday’s payrolls showed jobs growth continued in August but a gain of 142,000 represents the lowest rate of creation since the beginning of the year. US bulls are hoping that this shows an economy taking a breather through the summer holidays and not the beginning of a slowing of the positive trend. Certainly other indicators – both the ISM surveys were at multi-year highs – suggest that the expansion will continue at a decent rate. It may be too much to expect another quarter of annualised growth above 4% on the quarter, but the run rate is justifiably positive at the moment.
This Friday’s retail sales announcement is the most important data release in the G10 this week. This simultaneously combines how quiet a data week the upcoming calendar is and how much focus has shifted back on to the US economy. Auto sales continued very strongly through August and lead us to believe that the headline rate should move higher through the month as well. We are looking for an above consensus reading of 0.8% and the recent dollar run to continue higher.
Manufacturing and industrial production numbers from the UK are expected to slow this morning in line with last week’s disappointing manufacturing PMI release. Both numbers are expected at 09.30 and should grow at 0.3% and 0.2% on the month respectively.
We also received a speech from Mark Carney on another contentious issue within the UK – wage growth. We must remember that before the focus for sterling shifted north of the border, it was the lack of wage growth in the UK economy that had the Bank of England pushing dovishly on interest rate expectations. He speaks at 11.45am.
