04 Jan 2019: Growth Concerns hit markets

Growth Concerns hit markets

January 4th: Highlights

  • U.S. Manufacturing data pushes dollar lower
  • No deal concerns hit Sterling
  • Eurozone activity continues to slow

Dollar caught up in Growth Maelstrom

Worries about the strength, or otherwise, of the global economy created several waves that rushed through markets yesterday driving a flash crash for several currencies considered either risky or to be safe havens.

Concerns that the Chinese economy may be faltering were stoked by the news from Apple that sales of iPhones in China have slowed dramatically and this will adversely affect overall sales in the current quarter.

Any possibility that the Chinese currency could eventually usurp the dollar as the global reserve currency has been pushed back a generation in recent times by the feeling that while the Chinese are not necessarily manipulating the market, they would have the power to do so.

The news form Apple drove a wave of buying of the Japanese Yen as a safe haven play and this led currencies seen as riskier appreciably lower. Sterling and the Australian Dollar were prime examples since the pound is still under the cloud of a no deal Brexit and the Australian economy is inextricably linked to China, given the extensive trade flows between the two nations.

With yesterday’s poor ISM manufacturing data in the U.S. partly offset by stronger than expected private sector job gains, the scene is set for today’s employment report. The expectation is for around 200k new jobs to have been created but there are so many factors that could come into play that it is impossible to make a more accurate prediction other than to say it is reasonably certain that the headline will be between +150k and +250k, although that is by no means a sure thing.

Yesterday, the dollar index fell to a low of 96.20 and recovered only marginally to close at 96.28.

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If not for Brexit!

The UK economy while not tearing up any trees is performing adequately in the current global climate. It is therefore even more bizarre to see the pound trading at close to 1.1000 versus the single currency. The eurozone economy is clearly lurching towards a recession while activity indices in the UK are performing adequately and overall GDP while only growing at 0.6% in the most recent quarter is not predicting a recession.

BUT! Brexit is a massive cloud that overhangs the U.K. economy and analysts are awaiting the time when markets price in a no deal scenario following which calculations will be made as to just how much the economy will be disrupted.

With the return of Parliament imminent the whole political argument will recommence, culminating in MPs finally having a chance to officially back or throw out Mrs. May’s draft agreement. With the EU again commenting yesterday that the current agreement is the only one on offer and there are no plans for negotiators to reconvene since negotiations have been concluded, no deal is coming closer and closer to being the default position.

Following the flash crash early yesterday morning when the pound touched a low of 1.2409, a twenty month low, it recovered reasonably well and closed at 1.2635, 24 pips higher on the day.

The weekend press in the UK is bound to be full of what ifs and maybes as Parliament return, and while today will be dominated by events on the other side of the Atlantic, Monday could see the return of volatility for the pound.

Eurozone data to set the tone for weaker single currency

Attacks on the suitability of the euro as a currency for use by such a wide and diverse range of economies have been frequent over its twenty-year existence. With what is happening within the Eurozone currently, the old questions are being raised again. Does one size fit all? Is the fact that the (relatively) stronger economies of Germany, Spain, France, and Italy are moving in unison because of or despite the fact they are tied together by a single monetary policy.

There is little doubt that without Germany, and its economic and manufacturing might together with disciplined economic performance providing an ability to “ride out” difficult economic conditions, that the other three would be much closer to a recession. Having said that, Spain and Italy would have devalued their way back to something like growth by now.

Today sees the release of activity data for the services sector which should provide a little relief as this is an area in which the Eurozone continues to thrive. That is followed by inflation data both current, in the shape of consumer prices and future, illustrated by producer prices, the price of raw materials at the factory gate.

The euro continues in a weaker trend versus the dollar despite the gyrations that are caused by the dollar’s involvement in the effect of a global downturn.

It reached 1.1411 yesterday, closing at 1.1398 and has drifted marginally lower overnight as the dollar has recovered a little.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”