Thursday, July 6, 2017

U.S. Dollar falls as divergent economic performance lifts other majors

USD
The U.S. Dollar is down this morning after news of a moderate pace in hiring and the revelation of a lack of consensus within the Federal Reserve on the appropriate timing of selling off bonds purchased throughout the quantitative easing program. Recent underwhelming figures, especially in consumption, have casted doubt on the Fed’s ability to continue monetary tightening via higher rates and clearing of their balance sheet. Now that the FOMC Minutes show there’s debate, it is clear some voting members are starting to feel uncertain about the economy’s ability to withstand a less accommodative environment.
Furthermore, the numbers just simply aren’t helping in providing for a good dollar narrative. ADP Employment Change estimates from the last reading were revised downward and June statistics were lower than expected at 158K vs. 188K.  We have PMI and ISM Non-Manufacturing coming out at 9:45AM, both expected to have expanded.

EUR
The Euro climbed a bit more following actual progress in economic indicators. Purchasing Managers Index, Retail Sales, and German Factory Orders all showed better improvement than estimated, especially the production figure in Germany which had contracted previously and expanded 1.0% for June. The ongoing vitality of the economy coupled with the diminished sense of political instability after elections is making the Euro-zone an attractive stop for investors while fueling expectations of a rally for Euro for what remains of the year.
Back in 2014, the greenback improved as QE was revealed to have aided the economy in a major recovery from the Great Recession of 2008. Some traders are starting to price in a big upswing similar to the dollar’s fortunate run, but for the shared currency. We still believe there are some downside risks and that the European Central Bank may not act fast in tightening to avoid disturbing current momentum.

GBP

The Pound is performing in a counterintuitive way considering the negativity surrounding Brexit talks. The European Union’s Chief Negotiator Michel Barnier said in remarks that the free trade deal the UK wants, without being part of the EU, is “impossible.” Barnier warned that the UK has some very lopsided expectations and will need to make changes to its stance on the obligations that come with leaving.
We agree that Brexit is not a scenario that merits reward, but rather some punishment. After all, you are leaving 27 nations behind and without your full open support. These negotiations would have been entirely unnecessary had the Brexit not be put to a referendum. Of course, the EU will avoid a domino effect the best it can combat it. As Mr. Barnier put it best, the UK has “more to lose.” For one, Deutsche Bank is moving London trading offices to its home turf of Frankfurt.  

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