It was a session of US dollar dominance yesterday – driven at least in part by quarter end flows – as rising US treasury yields have driven another round of US dollar buying across the board. The other ongoing theme was one of Eurozone concerns which have continued to weigh on the single currency. Continuing weak inflation numbers leave the market wondering what the European Central Bank will do next to stimulate the economy, with a 0.8% year on year rise compared to 0.9% last month. There was initially a lower print of 0.7% due to an administrative error, but even when this was corrected by Eurostat, the euro failed to find much love.
The euro continues to make new lows against the USD and GBP, with banks also starting to revise their forecasts to take in further weakening. There was further mixed news from around the Eurozone, with much stronger German retail sales (+2.5%, with expectations of only + 0.5%) and employment figures, but with Italian industrial production and both French and Italian PPI coming in weaker than expected. The focus again shifts to what the ECB could do further and whether anything else will be announced at the conclusion of the European Central Bank meeting tomorrow. Central bank member Nowotny was noted saying low interest rates are not enough for economic recovery, so again the market will see if there is to be anything else. The Eurozone Manufacturing PMI and GDP this morning are unlikely to change the sentiment towards the euro.
Sterling followed the path of the euro yesterday, as the USD strength continued. The pound rallied briefly after a slightly better GDP release at 0.9% quarter on quarter compared with 0.8% expected, but a small boost was followed by a much larger dive as we continued to test recent lows. Compared with the euro’s falls against the dollar, however, the pound got off lightly, which meant that GBP/EUR continued to push higher towards the highs seen in mid-2012. For today, the market will keep an eye on UK manufacturing PMI, which is expected at the same level of last month – 52.5 – which marks a drop from the 55-57 range we have seen for the last year.
Returning to the dominant currency of the quarter end, as predicted by several banks. We often see unexpected moves at quarter end, though in this case, all roads seem to have led to the USD. The news of potential Russian capital controls put some panic buying back in the market, with US treasuries and other safe havens benefitting, while the Russian rouble hit all-time lows. The rumours were denied, but will no doubt return. The soft Chicago PMI and consumer confidence numbers should have reversed some of the gains, but in reality, not much was given back.
The Canadian dollar was hit by a trio of factors and moved to recent highs against the US dollar with GDP coming out flat and weaker than expected, while the Bank of Canada’s Cote warned of the potential for a sharp correction in house prices, and falling oil prices just added to the misery. This pushed USD/CAD to recent highs, while continuing to leave the loonie on the back foot along with most other currencies against the US Dollar.
The moves in commodities were more widespread, with Brent crude falling below USD95 for the first time in two years. But it wasn’t just crude, as silver fell 3.2% and copper was down by $1.50. Just to round out the theme, the NZD traded lower along with the stronger USD today, but the bigger loser was the AUD, which was given a beating following the release of worse than expected retail sales data (0.1% against 0.4% expected).
