Morning Commentary: Putting the Cart in Front of the Horse

Foreign Exchange - Morning Commentary

Putting the Cart in Front of the Horse

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
After Wednesday’s surprisingly dovish turn by the Fed and the dramatic drop in U.S. interest rates resulting in a much weaker U.S. dollar, we started to re-think our U.S. dollar forecasts for the rest of the year. We were forecasting U.S. dollar weakness primarily starting in second half of the year, and we began to adjust our forecasts to reflect the Fed’s new dovish perspective. We appear to have been a bit premature on the demise of the U.S. dollar (DXY).
Today’s dramatic drop in the EZ PMI, with particular weakness in manufacturing data, has caused EZ interests rates to crash and send the euro down sharply (see below). We have previously mentioned that exports have made a larger and larger share of EZ GDP over the past few years. With China slowing and many other countries faltering, demand for EZ exports is dropping and makes their economies vulnerable. Today’s data has rippled through all the markets with EZ equities weakening, commodity prices faltering, and U.S. interest rates down sharply with U.S. 10-year yields at their lowest point since January 2018.
I guess we will need to go back to the drawing board and reconsider our old forecasts. It is clear by the price action that markets remain highly concerned about EZ economic weakness; until such time that the U.S. economic outlook changes for the worse or the Fed capitulates more, the euro and other key currencies will remain vulnerable to continuing weak economic data.
  • Very weak PMI’s in France and Germany have sent the entire EZ complex into a tailspin this morning. EZ interest rates, equities, and currencies are all much weaker. French Composite PMI missed at 48.7 versus estimates of 50.7. German Composite PMI fell to 51.5 versus estimates of 52.8. German manufacturing collapsed to 44.7 from consensus estimates of 48.0…this is the deepest slump in German manufacturing in six years. German 10-year yields are back below zero for the first time since 2016.
  • Another downer for the markets this morning was Canadian Retail Sales for January. Expectations were for a gain of 0.4% but retail sales instead fell by 0.3% with December revised lower from -0.1% to -0.3%.
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