Dollar hit all time lows in February as the worst predictions of dollar bears finally came true. The US economic growth came to a standstill as Non-Farm payrolls printed their second consecutive month of losses while the EZ economy surprised many analysts with its relative strength. Still the market remains wary of the resilience of the EZ economy given the unfavorable exchange rate differentials and the implosion of US demand. Therefore a pause in the rally may be due.
Boris Schlossberg
Senior Strategist
Perhaps nothing shows the dour state of the dollar better than the downward sloping graphs of interest rates and the Non-Farm payrolls results. With yields constantly declining, while growth looks more and more problematic is it any wonder that the greenback reached record lows in February? The other parts of the economic picture look just a bleak, but the buck best friend may simply be sentiment. With the world so grossly bearish dollars even a small amount of positive news may provide greenback with a lift while it will take considerably worse news to push the dollar even lower. Still with US economic picture decidedly unsettled any dollar rally is likely to be a retrace in a overall bearish trend – BS.
The news out of the EZ remained remarkably resilient with unemployment rate continuing to improve while retail sales finally perked up. That background allowed the ECB to remain resolutely hawkish even as the Fed was feverishly reducing rates at the same time. The end result was a widening of interest rate differentials which led to explosive strength in the euro. We noted during the month that, “much to the consternation of euro bears the EZ economy is not crumbling despite disadvantageous exchange rates, high energy costs and a restrictive monetary policy.” Yet as Q1 progresses the market is likely to becomes more and more nervous about the impact of all these factors and euro one way trip may run out of momentum - BS
The first inkling of positive momentum appeared in the Japanese data this month as the Eco Watchers survey bounced off its decade long lows aided no doubt by improving picture in overall household spending and labor cash earnings. Economics however as usual had virtually no impact on USDJPY trade as flows were dominated by risk aversion/risk assumption. With equity markets once again under pressure the yen strengthened considerably coming to within a couple of hundred points of 100. Some traders feared intervention, but with Japan hosting G-7 this year BOJ ‘ s hands may tied diplomatically. Still a break of 100 would no doubt raise concerns amongst Japanese officials given the fact that exporters remain the lifeblood the economy. Therefore, any further yen strength below 100 is unlikely for the time being. - BS
The sterling spent most of February at the mercy of the BoE’s tug of war between concerns of rising inflation and a slumping economy. Eventually, pound bulls grabbed momentum on broad based anti-dollar sentiment and hawkish commentary from the Central Bank. A rise in CPI to 2.3% led the MPC to focus on inflation and leave rate’ s unchanged last week, after a quarter point cut in early February. The RICS House Balance showed that the housing market is continuing to deteriorate as prices declined for the sixth month. It is clear that that housing, a U.S. downturn and tight credit markets are weighing on the economy, as GDP slowed the most in a year. However, recession concerns were eased on stronger than expected retail sales and unemployment falling to its lowest level since 1975. Therefore, expect momentum to remain with the bulls - JR
February saw the Swiss economy show resiliency in the face of a US downturn. Strong domestic consumption spurred a 1% increase in GDP and increased retail sales for the 19th straight month. Also, increased demand from China led to a sharp rise in the trade balance to 1.22B from 0.2B the month prior. As economic concerns abated domestically, American recession concerns fueled global risk aversion and pushed the USD/CHF to a record low of 1.0183. However, there were signs that there exist downside risks to the economy. The KOF Leading indicator, which predicts the next six months, fell to a two year low and the growth in retail sales is slowing. Expect, the SNB to keep rates unchanged at their next meeting, as CPI stayed at a 14 year high. This and current risk adverse sentiment should remain supportive for the Franc going forward. - JR
The timeliest economic indicators out of Canada improved substantially in early 2008. Indeed, the indicators released at the end of 2007 were abysmal, but in January and February, Ivey PMI and employment figures bounced back in a big way, suggesting businesses and labor markets remain resilient. On the other hand, a sharp economic slowdown in the US or possible recession is taking a toll on trade numbers, as the surplus waned over the course of 2007. The trade issue along with easing inflation pressures and unstable financial markets has led the Bank of Canada to cut rates three times since December, and if conditions worsen, more rate cuts are sure to follow. – TB
Alone amongst the G-10 economies, Australia raised rates at the start of February as they continued to tighten monetary policy while the vast majority of other nations have been easing. The divergence in Aussie monetary policy is driven by a much healthier set of economic fundamentals compared to Europe and the US. However, there are signs that conditions may be deteriorating as GDP and retail sales growth slowed while the trade deficit widened. However, surging inflation is keeping the RBA hawkish. Nevertheless, should a US economic slowdown spread globally and price pressures start to let up, the Australian economy - carrying some of the highest interest rates in the G-10 universe - could come to screeching halt. – TB
The economic picture in New Zealand remains very mixed, as tight labor market conditions and strong inflation pressures have left the RBNZ with a hawkish bias. However, retail sales, business conditions, the trade balance, and GDP have all cooled recently. With interest rates at a record high of 8.25 percent, it is unsurprising to see growth slow. However, if CPI continues to surge while the economy erodes, the RBNZ could be put in a precarious position as they are forced to weigh the risks of foregoing growth in favor of price stability. Furthermore, if a major global slowdown takes place, a drop in export demand will likely drag the NZ economy down as well. – TB