The US dollar was back in favour last week against the low yielding currencies as the slight GDP miss was seen as broadly positive. Initial jobless claims dropped somewhat unexpectedly. Indeed, the US Q4 GDP was revised higher to 2.6 percent and claims printed at 311k versus a 323k consensus, bringing the four-week average to its lowest level since late September.
There are more and more evidence that normalisation of the US economy continues in 2014. As last year marked the beginning of the end of quantitative easing and therefore initiated the long process of Fed exit, the FOMC meeting last week added a new change into the thinking of the committee, that is the deletion of forward guidance on unemployment and inflation. This new development took some of the pressure out of the dollar.
Investors chose to renew pressure on the euro as we head into Europe’s inflation report on March 31 and the ECB meeting scheduled on April 3. Investors also seem to be more inclined to buy the dollar this week as spreads in rates between the euro and the US are shrinking, which bring investors to use the euro as a funding currency of choice.
The other highlight of the week was the return of emerging market currencies whereas commodity currencies rallied strongly after South Africa Reserve Bank kept rates unchanged unexpectedly, hence sending a message to investors that the economic situation was normalising.
The risk premium that was placed on emerging market currencies continued to collapse this week and we saw a sharp appreciation in high yielding currencies. It is most probable that investors are taking some comfort from the rebound in Chinese equities and a lessening of growth concerns. This easing in foreign exchange pressure in emerging markets also decreased the need to hike rates and thus helped stabilise emerging versus developed markets.
In summary, on the foreign exchange side, markets closed the week with a stronger USD against the low yielders. After reaching a high of 1.6647 on Wednesday, the pound ended the week at 1.6638. Euro behaved in a more bearish way. After dropping to a low of 1.3705, the currency closed the week near the low of 1.3752. In the commodity complex, gold continued to lose ground again as the situation in the US continues to normalise, whereas the geopolitical situation in Europe does not seem to be worrying investors.
The US February pending home sales data provided a mild disappointment falling 0.8 percent m-m versus expectation of an improvement of 0.2 percent. The US manufacturing activity slowed in March after nearing a four-year high in February albeit the rate of growth and the pace of hiring remained strong. Looking closer at the data, the US Manufacturing Purchasing Managers Index slipped to 55.5 from 57.1 in February. The new orders component fell to 58.0 from 59.6 in February, partly the result of a decline in overseas demand. Output slowed down to 57.5 from 57.8 while firms added workers for a ninth consecutive month
After harsh winter weather, the combination of an improving job market, stronger consumer demand, less drag from US government policies and a brighter global outlook is boosting optimism in the US. Indeed although GDP data came at 2.6 percent at an annualized pace in Q4 from 4.1 percent in Q3, personal consumption growth accelerated to 3.3 percent annualised from 2 percent.
Europe
During the latest ECB meeting, the council did not seem much worried about a possible deflation in Europe in order to introduce unconventional measures. However, now that the deleveraging in emerging markets has decelerated, and Inflows into EMU’s sovereign debt and equities have reached multi-year highs, while Spanish bond yields dropped to an eight-year low and Italian and Greek government securities rallied as the Euro data has been coming better or as expected; there are room for investors to start attempting to take profit on their Euro positions.
French consumer confidence climbed in March to the highest level since July 2012.The data for consumer confidence rose to 88 from 85 last month.
UK gross domestic product rose 0.7 percent in the fourth quarter of 2013 according to data released on Friday. From a year earlier, the economy expanded 2.7 percent, the most in almost six years, and there was an annual 8.5 percent increase in business investment.
Asia & Commodities
Australia: Reserve Bank of Australia’s Stevens said that there were encouraging signs of a transition from mining-led growth to domestic consumption. He played down the risks of a sustained rise in domestic inflationary pressures, while cautioning investors against getting carried away in Australia’s frothy housing market.
China: Potential RRR (Reserve Requirement Ratio) cuts are rising in China as the government seeks to manage growing defaults: Following the weaker than expected HSBC flash manufacturing PMI this week, a number of commentators have been calling for policymakers to loosen policy either through fiscal or monetary means.
Gold plummets: After reaching a high of $ 1,392 by the middle of the month, the change in the direction of the US data put tremendous pressure on gold prices. On the other side, according to the IMF data, emerging markets central banks continued to increase their gold holdings. Russia has increased its gold holdings by 7.247 tonnes to 1,042 tonnes in February. Turkey and Kazakhstan also raised their bullion reserves.
Turkey’s gold holdings rose 9.292 tonnes to 497.869 tonnes, the data showed. It is also worth watching China’s physical gold imports going forward. Indeed, China’s net gold imports rose 30.6 percent m/m to 109.2 tonnes in February amid increasing demand as the country allowed more banks to import gold. For now, prices continue to be depressed closing the week below $1,300 as investors continue to ignore the global geopolitical situation
The Peninsula
