Non-US central banks begin to act against USD weakness

Week ending Friday August 4 2017

USD flat over the week but very volatile within it. More declines occurred on the back of continued political turmoil in the Trump administration plus some modest evidence of Eurozone economic strength raising expectations for monetary tightening by the ECB. Yet it was mostly US politics that drove the USD down as the GBP rallied as much as the EUR in the first part of the week.

Bank of England acts, finally

Only strongly worded worries about the UK economy from the Bank of England managed to get the GBP down versus the USD in midweek.  The strength of the GBP must have become quite worrying for the BoE and they needed to act, which they did. Unexpectedly lower economic projections by a central bank always gets interpreted by markets as easier monetary policy ahead.

At the back end of the week the stronger than expected payrolls finally managed to get the USD to rally versus all currencies – as markets interpreted it as raising the likelihood of monetary tightening – as did we.

Swiss showing the way

The one “hard” currency that has managed to remain weak vs the USD weakness has been the CHF. The Swiss National Bank has stayed determinedly dovish throughout the drop in the USD. The deflationary pressures are just too high for the Swiss to follow the EUR up. As a result, the CHF has dropped to record lows versus the EUR. Hats off to gnomes of Zurich! They seem distinctly unattached to the false Philips Curve ideology so prevalent at the Fed and the ECB. It leaves traders and orthodox monetary experts perplexed but, of course, it bolsters the Swiss economy.

Eurozone economic growth not really strong

First estimate of RGDP in the Eurozone were released showing YoY growth rising from 1.9% to 2.1% and QoQ from 2.0% to 2.2%. NGDP data is not released for another 4 weeks. Only France of the big countries released NGDP data and it appeared to accelerate YoY but the growth rate fell back QoQ. The Eurzone growth is not faster than normal, still has many years of above average growth to make up for below trend growth over the last decade, and is now threatened by both absolute (all on its own) and relative (to the US) monetary tightening.

Equities and bonds quiet

The volatility in the USD was not followed by equities that remained flat over the week. The action in the USD last week and for some months has not been followed by meaningful moves in bond yields, they remain largely range bound. Expectations remain “firmly” at 50/50 for one more rate rise by December. The market probably remains more focused on the Fed balance sheet that could begin to shrink in September.

Economic news mixed, most bullish survey weakening

The “final” Markit PMI readings were, as usual, in line with the preliminary readings for July, in which both manufacturing and services has shown some recovery from earlier low’ish readings. The more recently very bullish ISM PMIs fell back in July, surprising markets by their weakness – especially the very big drop in the non-manufacturing services index.

Hard data showed weak figures for June personal income and outlays (expenditure) and for the associated price indexes too. Although this data had already been incorporated into the 2017Q2 GDP estimate the markets were mildly disappointed by the weakness.

The payrolls data for July were more bullish, sending the USD up. The All Employees Average Weekly Earnings figure stayed at a near term high for YoY growth of 2.8% (driven by a rise in Average Weekly Hours) which, combined with a good July employment figure, means wages component of nominal GDP (via the Income approach) will also be quite strong. The more established non-supervisory employees Average Weekly Earnings growth fell back to 2.4%.

Next week there is more data on the jobs market via the Labor Market Conditions Index, CB Employment Trends and the JOLTs figures. If strong the Fed will cite it as evidence for its Philips Curve views, if weak it will be transitory. Whatever.

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