GBP/EUR 1.1831 (0.8450)
The temporary fix for the US debt ceiling and the end of the shutdown of the US government signalled bad news for the USD as markets looked towards the cost of the impasse to the US economy. Most now believe that the US will maintain their current QE program into 2014, this has seen US equities rally to record highs and investors take advantage of loose monetary policy to maximise their gains. Overnight in Asia stocks also rallied, positive risk sentiment was boosted by a 2.2% rise in Q3 Chinese GDP with the year on year figure showing growth of 7.8% as expected.
Yesterday’s slide in the greenback was accelerated by a jobless claims release, indicating a rise in claims to 358k, vs expected 335k. Jobless claims for the last two weeks have been a lot weaker than expected and the shutdown appears to be the root cause of this, given up until this point Q3 jobless claims had shown week on week improvements, with expectations for Q3 labour market to outperform Q2.
The shut down means that many of the US regular data releases were on hold and next week it is looking like we may see the whole backlog hit the wires, this will no doubt bring increased volatility to the USD and data may not be truly reflective of real conditions given the impasse. That being said we have to play the cards we are dealt and right now the US is not getting the run, albeit this recent “bad luck” is self-imposed.
The EUR rallied strongly against the USD but against other majors there was little change, the single currencies liquidity demand boosting it over 1% vs the greenback yesterday, although it posted notable losses against GBP and CHF. Short term yields in the EUR posted 13 month highs, again higher real interest rates may damage the region’s fragile recovery and we’d expect to see some action from the ECB before year end, as such treat EUR strength cautiously, especially as a third rescue for Greece is being prepared.
The pound was by far and away the strongest performer of majors yesterday. The pounds strength gathered pace on news that retail sales grew 2.8% versus 2.2% expected. In our view much of the pounds strength came from comments from the BOE’s chief economist as he mentioned the BOE could “conceivably” raise rates as early as 2014. This is a rather reckless comment when the BOE is adamant rates will not be rising until 2016, unless certain market conditions prevail. Based on this we believe these comments were at the extreme end of expectations and with a very aggressive move higher in GBP since July we believe the pound will be very vulnerable to disappointments.