FX: Risk Appetite Unfazed by US Data Misses

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There is a general sense of optimism in the forex market this morning with most of the major currencies and U.S. equity futures trading higher. The mild disappointments in U.S. data failed to have a lasting impact on the dollar. Third quarter GDP growth was revised up to 2.7% from 2%. While the upward revision is good news, it missed expectations and more importantly personal consumption was much weaker than initially reported. Stronger growth came primarily from gross private investment with a small contribution from exports. The fact that jobless claims dropped below 400K is good news but at 393K, it did not fall as much as economists had anticipated and last week’s numbers were revised up to 416K from 410K. For the Federal Reserve, stronger GDP with weaker consumer spending and a small improvement in jobless claims will not be enough to inspire less dovish monetary policy. Pending home sales will be released later this morning and we do not expect any major surprises.

Meanwhile European currencies are performing well thanks to better than expected economic data and lower borrowing costs. German unemployment rolls increased by only 5k compared to a forecast of 16k. Italian business confidence also improved as the country auctioned off 5 and 10 year bonds at the lowest yield in 2 years. In Spain, 10-year bond yields fell to a 6 month low of 5.25%. All of these factors contributed to the resilience of the EUR/USD, which is priming for a break of its November high. Stronger data and lower borrowing costs are positive fundamental developments that reduces the pressure on growth and the risk of Europe’s sovereign debt crisis exacerbating. As long as Spanish bond yields remain below 6%, the panic in Europe will remain at a minimum.

It is also worth mentioning that “Asian currencies” such as the Australian dollar and Japanese Yen are not performing nearly as well. Weaker business investment is weighing on the Australian dollar and renewing talk of rate cuts by the RBA. In Japan, 10 year JGB yields dropped to its lowest level in more than 9 years.

Kathy Lien
Managing Director

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