Global geopolitical risks continue to be the main market focus this week, causing continuous pressure mainly on emerging market currencies. Indeed, foreign exchange markets were largely dominated by tension in the Middle East, keeping markets in a risk off mode. Emerging markets remain under pressure against the dollar and the euro with the major losers, the Turkish lira and the Indian rupee hitting all time low. Strong safe haven currencies like the dollar, euro, Swiss franc, Pound and the Japanese yen were well bid especially due to their status of reserve currencies. On the other hand, gold and oil were also strong during the week over the situation in the Middle East. On the equity side, global markets were soft, and developed bond markets were well supported. BRIC nations attempted to stop the flood out of international investors by mentioning talks of setting up a joint bank with $50bn in capital.
In the US, the hunt for a replacement of the Fed chairman continues with Yellen and Summers the front-runners. On the monetary policy side, officials continue the same rhetoric stating that they remain data dependent, which forces markets to adjust their odds and make them vulnerable to economic figures volatility. Major US economic figures have become extremely important as investors watched them carefully for direction of the dollar against the G10 currencies. For now, the 10 years US bond yields continue their march to the three percent threshold, reaching a high of 2.89 percent and making the dollar the favourite bet in a global turmoil and interest rate path uncertainty.
In summary, the euro had a relatively stable week despite faltering on Thursday after the worst than expected German figures and better US GDP figures. The euro reached a high of 1.3399 on Wednesday; however, investors took the opportunity to take profit ahead of the German elections and amid the worst than expected German figures. The currency closed the week at 1.3220
The Sterling Pound continues to trade sideways as Bank of England governor continues using his dovish tone over the UK monetary policy. After reaching a high of 1.5612 in the beginning of the week on stronger than expected retail sales, the Pound closed the week slightly lower at 1.5504.
The Japanese yen continues to trade as a safe haven currency again on the back of all the emerging market currencies woes. The currency was mostly affected by the unwind of the Asian high yield trades as investors were cutting their carry trade bets in favor of the Japanese yen. After reaching a low of 96.82, the Yen closed the week weaker at 98.17 after the US GDP came above expectation.
In the commodity complex, gold reached a high of $1433 on the back of the Middle East turmoil and despite rumours than the central bank of India might be selling some of its reserve to shore up its dollar reserves. The metal closed the week slightly below the $1,400 level.
Stronger job growth
Federal Reserve Bank of Richmond President Jeffrey Lacker, a consistent opponent of the central bank’s bond-buying, said this week that a stronger job market should allow policy makers to start winding down the quantitative easing program soon. Lacker also said that central banks should avoid channelling credit to specific segments of the economy through rescues or asset-purchase programmes. Moreover, US yields reacted positively to the Q2 GDP figures released on Thursday. The number printed a 2.5 percent, a significant upward revision from the 1.7 percent printed a month earlier.
In summary, the strong data continues to set expectation that the Fed is likely to start tapering its QE programme in the September Fed meeting, hence, keeping the dollar well supported.
With the German election looming in the background, investors continue to wait for additional concrete evidence that the Euro zone has come out of the recession. Last week, ECB’s Nowotny said that the ECB’s forward guidance on interest rates to be low for a prolonged time “won’t be in place forever.” He mentioned that the path remains dependant on inflation expectations. On another front, EU’s Olli Rehn pressured France and Germany mentioning both countries were holding the key to rebalancing the European economy and must follow through on promised reforms.
German unemployment rose by 7k m-o-m in August partly reversing the previous months’ falls and disappointing relative to market expectations of a further small drop of 5k. The labour market has remained very stable in 2013, as the number of unemployed was 2.94m in August in line with the average of 2.94m for the first 8 months of the year. Analysts argue that the effects from the holiday season could have played a role in August. The unemployment rate remained at 6.8 percent in August unchanged for the past fourth months.
While the PMI composite employment index fell to 49.9 in August from 50.4 in July it is still higher than in Q2 (49.1) and near the no-change threshold of 50. The Ifo business climate rose to 107.5 in August from 106.2 in July, which continue to remain positive for the country. Overall and despite the slight increase in unemployment, the German labour market remains very healthy with a moderately positive outlook.
Inflation released on Friday came below expectation in August at 1.3 percent compared to 1.6% in July. Although they expect inflation to be volatile, the ECB will be watching this closely as they are concerned about prices dynamics being on the low side when they are between one to 1.5 percent.
This is likely to suggest a dovish tone from Draghi at next week’s press conference with a re-iteration of the forward guidance message with a downward bias to rates. That may overshadow the Euro against a backdrop of what could be relatively imminent Fed tapering.
The Peninsula
