More of the same in March, as the dollar slide continued. The unit once again hit all time lows against the euro and once again the economic data showed further signs of contraction as US lost jobs for the third month in a row. However, March also produced first evidence of weakness in the EZ , demonstrating that US was not the only G-3 nation to suffer from the oncoming slowdown in global growth and suggesting that the EURUSD rally may be coming to an end.
Boris Schlossberg
Senior Strategist
Dollar continued to collapse against the euro in the month of March reaching an all time low of 1.5901. Looking at the data it is easy to see why. On almost every important measure of performance, US economy failed miserably. From interest rates to employment to GDP to Retail Sales, all gauges pointed downward indicating that the economy was either on the verge or actually already in a full blown recession. The critical question going forward is will these trends accelerate or taper off? The answer could hold the key to dollar’s movement in the near future. Most importantly as usual will be the employment numbers. If NFP’s continue to contract printing at -100k or worse, the greenback will have a difficult time stabilizing event at these modest levels– BS.
Although the euro made new highs against the greenback in the month of March the economic data has started to send off serious warning alarms indicating that the high exchange rate of the currency is starting to affect EZ economic growth. Most troubling of all is the significant deterioration in Trade Balance and Retail Sales numbers. The Trade balance figures registered their worst reading this decade dropping to a deficit of more than -10 Billion euros, while retail sales contracted by -0.5% versus 0.2% expected suggesting that despite improvement in labor conditions the consumer in EZ remains quite guarded about his prospects. In fact labor is the last bastion of strength in the region. If employment growth suddenly slows ECB will have to quickly abandon its unrelenting hawkish policy. - BS
Last month we wrote, “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. “ This month the improvement in conditions continued, but the going has been slow. Most notably the severe deterioration in the Tankan survey suggests that manufacturers are concerned about the growing global slowdown in demand along with the rapid appreciation of the yen and growth going forward is likely to decelerate. On a separate note, the vacancy at BOJ appears to have been finally filled with Masaaki Shirakawa taking the governorship, but with turmoil surrounding the nomination process Mr. Shiirakawa is unlikely to make any rapid changes to policy once he officials assumes the post. - BS
In contrast to the euro sterling spent the month of March declining steadily as expectations of interest rate cuts weighed heavily on the unit. Despite relatively healthy employment and retail sales numbers, as the month progressed it became evident that the slowdown in housing was quickly turning into a severe contraction. House price inflation was the primary reason for BoE’s staunch hawkishness over the past several years. However, with the sector clearly ailing and the price trends reversed, many market participants are beginning to anticipate a much more accommodative policy from the BoE going forward with Mr. King and his MPC colleagues most likely lowering rates on a monthly rather quarterly basis as we move into Q2 of 2008. This in turn should keep the pound depressed for the foreseeable future. -BS
After reaching a spike low of 9644 in the middle of the month on heightened risk aversion fears the Swissie ground lower for the rest of the month as economic data from the mountain economy started to show some cracks in the armor. Retails Sales continued to lag rising only 1.3% while the KOF Leading Indicator index dropped to 1.55 – its lowest reading in two years. While inflation continued to rise driven by skyrocketing energy prices, any possibility of a rate hike appeared remote as Swiss monetary officials minimized the impact of rising prices. SNB President Roth noted that, ““When oil prices stabilize around $100, the inflation rate should decline in the second quarter.” Nevertheless, with Swissie now carrying an interest rate premium to the dollar, the unit is unlikely to weaken much more against the greenback with the pair remaining rangebound for the time being - BS
Most other key indicators have turned south under the weight of a US slowdown. Employment looks to be accelerating lower as firms cut capacity in the face of slowing US demand, a trend echoed in the topping of Ivey PMI. While trade figures have retraced from recent lows, the trend is still pointing to further downside. Overall GDP has plummeted to the lowest level in 2 years. While a decidedly upward trend in Retail Sales offers a positive view of domestic demand, this data is relatively backward looking with the latest data point being the January reading. The decline in employment since then is likely to upset this metric going forward. With CPI continuing to decline, the BOC will have scope to reduce rates further. – IS
The RBA has clearly signaled that rates will remain at 7.25% for the foreseeable future. While expanding employment still puts pressure on tight labor markets and bids up the price level, some signs of cooling have emerged in declining Retail Sales numbers. The trade deficit has continued to balloon as infrastructure constraints and bad weather have delayed or disrupted shipments of coal, iron ore, and oil. GDP has turned lower as well, though substantially more slowdown is likely given the extent of monetary tightening that is just now starting to permeate into the board economy. Though CPI remains buoyant, price pressures can be expected to ease as the slowing of economic growth accelerates. – IS
The RBNZ continues to find itself walking a tight balance between sustaining economic growth and managing inflationary pressure. The tight labor market continues to exert pressure on the price level, with CPI rebounding strongly in Q4. Retail Sales growth has tapered off some in early 2008, and business sentiment continues to decline under the weight of record-high borrowing costs. GDP has remained supported for now by the positive effects buoyant commodity prices on trade figures, though if global demand slows and Australia overcomes infrastructure and weather constraints supply for many Kiwi export goods will swell and prices ease. The recent free trade accord with China should help matters here, but its effects are unlikely to be seen in the near term. – IS