Morning Commentary: “Economic Risks Have Moved to the Downside”

Foreign Exchange - Morning Commentary

“Economic Risks Have Moved to the Downside”

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Our title this morning comes from comments made by ECB President Mario Draghi after the ECB kept monetary policy unchanged as was expected at today’s ECB meeting. His overall comments about EZ economic weakness are not surprising given the recent weakening EZ economic data and have been further supported by very weak EZ PMI data this morning; German manufacturing contracted for the first time in four years and French PMI Service readings moved into economic contraction territory.
 
European currencies weakened sharply earlier this morning but have since rebounded quite nicely. Global equities are mixed but G7 interest rates are lower in yield once again. Adding to the doom and gloom from the ECB and the EZ PMI readings were comments from Commerce Secretary Wilbur Ross at Davos stating that the U.S. and China were “miles and miles” from resolving their trade dispute which caused U.S. equity futures to falter and interest rates to drop even further.
 
Markets will continue to lurch from optimism to pessimism and back again as bulls and bears continue to sort through the news and data as to the state of the U.S. and global economy over the short, medium and longer term. Global equities in January somehow see a silver lining in almost all the news and data which is 180 degrees from where we were in December. The U.S. dollar (DXY) and many of the major currencies remain trapped within recent ranges and we anticipate foreign exchange to continue to take a back seat to equities and interest rate movements and see currencies remaining range bound in the short term.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Australia reported its December jobs report today and it was mixed. The UR dropped from 5.1% to 5.0% and the number of jobs added beat market expectations with a gain of 21,600 jobs. However, the jobs gains came through part time employment as full time employment dropped by 3,000. The labor participation rate also fell from 65.7% to 65.6%. The Aussie dollar is weaker on the session.
  • EZ Composite PMI readings were very disappointing as they came in well below expectations at 50.7 versus expectations of 51.4. A reading of 50.7 translates to GDP growth of 1%. Q4 EZ data remains very weak and refutes any notion that the Q3 EZ economic slowdown was temporary. Despite the weakening economic data, the euro remains trapped within the same ranges since November.
  • U.S. jobless claims fell to 199,000 which is the lowest level since November 1969. Furloughed Federal employees requesting unemployment aid doubled from the previous week but those figures are tracked separately from other unemployment claims.
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