Sterling remains a sneeze away from fresh, near-5 year highs this morning against the USD. Two of this year’s strongest trends have been strong data from the UK and doubts over the strength and viability of the US recovery and both were in evidence when driving the GBP/USD price higher yesterday.
Those who are bullish on the UK recovery were encouraged by the manufacturing and construction sector numbers with yesterday’s service sector adding further. Services PMI drove to 58.7 vs 57.8 expected; a 4 month high. Of the 0.8% GDP reading for Q1, 0.7% was from the services sector so the performance of this industry is imperative. New orders were strong, and together with a pick-up in backlogs, should allow for continual increases in service sector employment. Critics will worry as to the strength of the services sector and the lack of a rebalancing effort and it is only in recent weeks that I have seen comments that the UK economy is ‘overheating’ too quickly. For now, the jury is out and the news is good.
That provided the back bone of the sterling strength and unfortunately for dollar bulls it was the negatives of the jobs report that people were focusing on through yesterday’s session. US yields were pushed lower as, instead of a 288,000 job print on the headline job number, the market wrung its hands over the decrease in the participation rate, the real picture for the longer-term unemployed and the stagnation of wage increases.
It is not only sterling that the USD is slipping against, hitting 7 week lows against the EUR, 6 week lows against CAD and the worst level since August 2011 against the NZD. With volatility remaining low you would have think that we could be kept waiting for a rally in the USD as a whole.
Yellen’s testimony to the Joint Economic Committee this afternoon has the ability to arrest this slide in USD but will depend on some bullish language from the naturally dovish Fed Chair. Should she reference the low unemployment rate of 6.3% as not truly indicative of the jobs picture and emphasise the accomodative nature of Fed policy, then we are in for further USD weakness.
The picture was calm over the Asian session as the market waits on Yellen but movement was certainly evident elsewhere, especially in the NZD. The RBNZ Governor Graeme Wheeler last night warned that “if the currency remains high in the face of worsening fundamentals, such as a continued weakening in export prices, it would become more opportune for the Reserve Bank to intervene in the currency market to sell New Zealand dollars”.
While we think the likelihood of outright intervention into the market is very low, you have to kick rate rise expectations further on out along the curve. OIS swaps that measure expectations on when interest rates will rise saw the likelihood of a rate hike at the RBNZ’s next meeting, due June 12th, fall from 89% to 84%. We think this could fall further and should see some further NZD weakness.
The Aussie dollar has also slipped overnight – retail sales were 0.1% higher in March compared to a 0.4% expected rise. Despite this, AUD remains at strong levels given the level of carry at the moment.
GBP/EUR has pushed to a fresh high of the year this morning following a unexpected disappointment in German factory orders. Adjusted for inflation, orders fell 2.8% in February with domestic orders 0.6% lower and export orders recording a 4.6% decline. Most of this came from within the Eurozone with orders amongst the 18 falling 9.4%.
