Risk assets and currencies just love the smell of printing presses in the morning. Friday’s payrolls makes it virtually a fait accompli that the Fed will implement some form of QE when they meet on Thursday, providing a further boost for risk appetite after Super Mario’s commitment to unlimited ECB bond purchases the previous day.
The single currency is now up near 1.28, the Aussie almost touched 1.04, the gold price surged more than USD 40 and European equities celebrated some more. In contrast, the dollar was on the back-foot, with the dollar index falling to a four-month low. Indeed, the dollar index has lost 4% since late July. Looming on the horizon are some more big hurdles.
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The German Constitutional Court is expected to rule on Wednesday regarding the legality of the European Stability Mechanism. Dutch elections are being held midweek as well, amidst legitimate concerns that it could take some considerable time to form a new coalition government. In Spain, a crucial audit aimed at identifying the capital requirements of Spain’s beleaguered banks is due later this week, and the troika is continuing the process of reviewing Greek government finances. .
Commentary
Ben needs to re-start the printing press. QE3 from the Federal Reserve is on course to arrive later this week. This is the only conclusion that can realistically be drawn from the August payrolls figures, which once again confirmed that American jobs growth remains sluggish. Over the past six months, household employment has barely changed, at a time when the unemployment rate has remained just above 8%. If not for a constant stream of discouraged workers dropping out of the search for work, the unemployment rate would have been quite a lot higher. Indeed, the number of people not in the labour force has jumped by more than one million since March! To add to the sombre jobs picture, aggregate hours worked in the three months to August barely rose vis-a-vis the previous three months, and average weekly earnings have increased just one month in the past four.
Unsurprisingly, the dollar has lost some further ground, and the euro is again in the ascendancy. QE3 is coming, the only question now is how much. It is just possible that the Fed might try a slightly different approach this time around, by announcing that they are implementing QE but not divulging how much.
Breaking the barriers. Another fine day for the single currency on Friday, with the euro reaching the 1.28 level for the first time in three months. The major catalyst was broad approval of Super-Mario’s OMT plan, which at the same time has also transformed the way that bond yields of the troubled sovereigns are trading. For instance, the Spanish 10yr yield fell another 40bp on Friday to 5.65%; at the start of the week, the yield was up around 7.0%. Likewise in Italy, where the 10yr yield was another 20bp lower at 5.05%; back in late July before Draghi’s commitment to ‘do whatever it takes’, the 10yr yield was at 6.75%. Portugal is an even bigger revelation – the 10yr yield plunged another 60bp on Friday to around 8.0%, the lowest yield since March 2011 – back in February, it briefly traded up through 18%! Apart from the positive response to Mario’s new bond scheme, the euro benefitted from significant short-covering on the part of traders and investors who are overwhelmingly short. Also, there was a raft of other positive news on Friday to help propel the euro to more elevated climes. Twenty German legal experts unanimously declared that the German Constitutional Court will not block the ESM. German industrial production and export figures for July were stronger-than-expected, US non-farm payrolls were weaker-than-expected and Greece is apparently chasing 54K accounts that moved EUR 22bn abroad in the three years since 2009 in an apparent endeavour to avoid tax. We remain encouraged by the euro’s price action, and would not be surprised if the 200d moving average at 1.2840 was broken before too long. Apart from a very brief penetration back in October last year, the single currency has not traded above the 200d moving average for more than a year. The euro is also doing some damage against other majors as well – for instance, EUR/GBP is now at 0.80, while our favourite EUR/AUD is at 1.2350.
Happy central bankers abound. Looking at recent price action on the Swiss franc, Mario Draghi is probably not the only central banker with a smile on his face. EUR/CHF reached a six month high of 1.2150 on Friday, as speculation intensified that the SNB may soon lift the EUR/CHF floor. Being head of the SNB has been a fairly thankless task over the past year (leaving aside Hildebrand’s spousal issues) as the central bank has fought to keep the floor on EUR/CHF intact, which has resulted in a 70% increase in FX reserves over the same period. But three things have happened to put a smile on the face of the current head of the SNB, Thomas Jordan. Firstly, the reaction to Thursday’s ECB announcements has further undermined euro bears, enhancing the current uptrend in EUR/USD. Secondly, the market has itself become a little jittery ahead of this week’s quarterly policy announcement from the SNB. Thirdly, the latest reserves data from the SNB has shown reserves rising ‘only’ USD 10bn in August, which contrasts with the past three months seeing reserves gain an average of USD 57bn a month. Although direct comparisons are difficult given the nature of SNB interventions (which are often through swaps), the change is certainly indicative of far less heavy lifting on the part of the SNB in protecting the current cap on CHF strength against the single currency. Earlier last week, we were doubtful that the SNB was looking to change the cap, choosing to concentrate its efforts on mitigating the effects of franc-liquidity injections on the banking sector and also property markets. But if markets are going to make the move on its behalf, the SNB is unlikely to ‘look the gift horse in the mouth’.
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