Search ForexCrunch

A much weaker-than-expected US non-manufacturing ISM outcome for April, together with a soft ADP result (see below), combined to trigger another episode of risk aversion yesterday. The poor services ISM reading came as a real shock, contributing to a sense that the domestic economy has lost traction over recent months. Both commodities and equities got it in the neck, with the gold price falling below $1,520, Brent crude dropping below $121 (earlier this week, it was up at $126), and major European bourses down more than 1.5%.

In currencies, the Aussie fell below 1.07 at one stage overnight, not helped by very soft retail sales data for March; the Kiwi fell more than 1% to below 0.79, and both the yen and the Swiss franc were again well-bid. Aussie bulls in particular were keen to take some money off the table – there are plenty of them. If they decide to leave the party all at once there could be an almighty squash.

Guest post by FXPro



US private sector jobs rose 179K last month, say ADP. Private sector payrolls swelled by 179K last month, according to the latest estimates from ADP Employer Services. The average gain over the previous four months was 212K, so this latest figure is a little below those of recent months. The pattern over the past year of small and medium-sized employers accounting for the bulk of the hiring remains in evidence. Also observable has been a slowing in services-sector employment. If payrolls disappoint on Friday, it might be yet another reason for the dollar bears to bash the currency down further.


UK construction data weighs on the pound. Sterling was again one of the weaker performers yesterday, coming under further pressure after the recent run of softer data and seemingly dovish comments from BOE governor King. The soft construction PMI data was the major catalyst, the headline recording a second consecutive monthly fall and pushing the index down to 53.3 (back to its 6mth average). In the wake of the weaker manufacturing PMI earlier this week, the data suggests that one of the mainstays of the recovery so far could be wavering. From Q2-’09 to Q4-’10, growth in construction contributed 30% to the increase in overall output of the UK economy, far above its 6% weight in the overall economy.


One of the other main elements of the recovery, namely stock-building, may also be starting to wane. This is fairly normal, given that changes in stocks is the most volatile element of GDP. But, right now, the concern is that growth in investment and consumer spending are not going to be sufficient to make good the short-fall being seen in the previously more buoyant areas of the economy. For now, those on the MPC who are reluctant to tighten rates are finding more solace in the real sector numbers. Sterling has pushed up to the 0.90 level vs. the EUR and remains one of the weakest performers of the major currencies so far this week.

The euro’s rich Asian friends. Price action for any currency is often revealing, and in the euro these days it seems that there is no bad news that can drag it down for long. A possible Greek debt restructure, a Portuguese bailout, a sharp decline in Spanish house prices, a Finnish electoral revolt against bailouts – all have been essentially ignored by the single currency. Instead, there are three main drivers that are propelling the euro to ever-higher levels in defiance of these potential negatives. First and most importantly is the incredibly powerful and consistent support the EUR is receiving from Asian FX reserve managers, who remain determined to diversify out of the brittle dollar. Quite understandably, these sovereign wealth funds see the euro as the only viable alternative to the dollar as a major reserve currency, given the size of the eurozone and the liquidity of their securities’ market.


Second and related to this first point, Germany’s underlying economic strength, at a time when other major advanced economies are all really struggling, is also providing the euro with a significant fillip.


Thirdly, interest-rate differentials continue to support the euro, providing traders and hedge funds with an opportunity to benefit from the carry trade (where the dollar is the funding currency). In the past six weeks, the 3mth EUR/US Libor interest rate differential has widened from around 80bp to almost 110bp currently. This week’s price action reconfirms the depth of the buying interest in the euro at lower levels. On each day this week, the euro has been sold aggressively during the Asian session only to bounce back sharply during London trading. It is not just Europe’s policy-makers that are determined to see the euro survive and prosper – Asia, it seems, wants the same. With rich friends like these, it is hard to dislike the euro.


Portugal’s aid plan still needs to be ratified by EU. More detail gradually emerged on Wednesday regarding the EU/IMF aid plan to Portugal. Firstly, it will be shorter than those of either Greece or Ireland (both 7 ½ years), at only three years. Secondly, in order to achieve the budget targets which represent the cornerstone of the agreement, Portugal has accepted the need to raise taxes, reduce spending and sell off state assets. Of interest is that Finland may be edging towards acceptance of Portugal’s bailout. Apparently the largest party in Finland has decided to hold negotiations on how to respond to Europe’s debt crisis, separate from talks about establishing a coalition, in an attempt to forge a pro-bailout government. Portuguese 10yr bond yields fell by 20bp at one stage yesterday.