Dollar Fails To Rally Following Stronger US GDP Growth BoE Governor King Says "Serious Slowdown" An "Exaggeration" Yen Slides On More Evidence Of a Slowdown In Japanese Economy
EURUSD
The euro continues to hold onto its gains even as personal consumption picks up in the US, driving growth higher by 3.9% in the third quarter. The market had expected Q3 GDP growth to remain unrevised at 3.7% and should have been pleasantly surprised by the improvement. Although some can say that the dollar rally was tempered by a weaker Chicago PMI and consumer confidence, the market's reaction to the 8:30 EST GDP release was muted at best. This leaves Friday's non-farm payrolls release the next possible catalyst for a meaningful correction in the euro. According to a report released a few years ago, GDP has fallen in importance because most of its components are known before the actual release. The significance of non-farm payrolls on the other hand is growing in importance, especially with the market tying future growth in consumption to rebounding employment. Across the Atlantic, economic data was also mixed. Although the labor market improved for the second consecutive month in France, consumer confidence and business confidence deteriorated. As expected, the flash estimate for CPI was 2.2%, which is a decrease from the 2.4% reported in October. This is still above the ECB's 2% target and reflects the upward pressure exerted by oil prices. According to the OECD, fears that oil prices may remain relatively high could dampen world economic growth next year. Eurozone economic sentiment has already fallen to a 4 month low.
USDCHF
The outlook for the US dollar remains uncertain with the market struggling to decide which is more important - strong growth or the deficits? The Institute for International Economics was the latest to chime in and say that the dollar needs to correct in order to close the current account gap. On the growth end, although the US data released today was mixed, the underlying tone still paints a positive picture for the outlook of the US economy. Not only did GDP growth surprise on the upside, personal consumption also increased to the strongest level since December 2001. Inventories also fell which suggests that activity could be robust in the last quarter of the year, as companies restock to meet holiday demand. Manufacturing activity in the Chicago region expanded for the 19th consecutive month. There was particularly strong growth in the employment component, which leads in well to Friday's non-farm payrolls release. Meanwhile, consumer confidence took a plunge in November, which marked a fourth consecutive decline. Optimism on current conditions improved while the outlook component deteriorated. It appears that consumers aren't quite sold on a strong rebound in 2005.
GBPUSD
The British pound surged nearly 1% against the dollar today as it broke above the psychological 1.90 level. Compared to the lackluster performance in the euro, the pound took comfort in encouraging words from Bank of England Governor King who said that the slowdown in the UK economy is temporary. According to King, the data for the fourth quarter has been stronger than expected, and therefore it may be an "exaggeration" that a "serious slowdown" may be occurring. This comes on a day when retail sales according to the CBI increased to the highest level since July, house prices increased 1.0% m/m, while consumer confidence as measured by the Gfk consumer confidence survey edged higher in November. Although this is a quite refreshing change from the generally weaker data reported over the past few weeks, it does not shift the outlook for the UK economy, which is that a continued slowdown is in store.
USDJPY
There was more consolidation in the Japanese yen today amidst weaker economic data. Not only did the jobless rate increase and workers spending rise by less than expected, industrial production was negative for the second consecutive month while small business confidence retreated. There is an article in the Nihon Keizai Shimbun that says that the way the Japanese government manages uncertainty risk from the US and China will dictate whether they are able to avert an outright economic downturn. The Ministry of Finance has been relatively patient at this point with the appreciation in the Japanese yen. This is partially because speculative positioning is only half that of the extreme levels that we saw in February of last year. Also, many firms are expected to be properly hedged which reduces the the pressure on the MoF to intervene. Nevertheless, in the context of slowing growth, we continue to caution about intervention risks.