FX: Risk Aversion Setting In, What More Can Be Done?

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Risk aversion has officially set in with the U.S. dollar and Japanese Yen trading higher against all of the major currencies. Weaker economic data from the U.S. and Europe shined a bright light on the ongoing weakness in the global economy. While the HSBC PMI index increased this month, the 11th consecutive reading below 50 is still bad news for China and its trade partners. The lack of growth is the main problem that these countries face and unfortunately more stimulus hasn’t done the trick – yet. Yes, growth would have probably been weaker without the abundance of cheap money but low borrowing costs alone has failed to encourage companies to hire and consumers to spend.

Last month’s non-farm payrolls report was so weak that the Fed felt the need to put the pedal to medal and ease in September. Based on the last 2 weekly jobless claims reports, we’re not expecting an improvement in job growth this month. The last time we had 2 consecutive weeks of jobless claims as high as these was in June, when payrolls rose by a mere 45k, its weakest in more than 1.5 years. While manufacturing conditions in the Philadelphia region improved in the month of September, it still contracted for the fifth straight month. Improvements in the Philly Fed index which rose from -7.1 to -1.9 does not offset the drop in leading indicators and more importantly, the weakness of jobless claims.

The problem is that even with these disappointments in data, the U.S. is not doing nearly as bad as the Eurozone. While economic activity improved in Germany, the rest of the region is suffering terribly from the burden of austerity and weaker global growth. According the Eurozone composite PMI report, which covers both the manufacturing and service sector, activity reached its lowest level in more than 3 years last month. Unfortunately the outlook isn’t likely to brighten for the Eurozone in the months to come, as many countries still need to get their fiscal house in order. Slow growth in China makes the global outlook even worse.

If this is the reaction that investors have to out of the box stimulus from 3 major central banks, then what else can be done? Having just announced a new round of bold and aggressive unconventional monetary policies, it is unlikely that more action will be followed quickly. As a result, investors and the market will be left to their own devices through at least the next month. A number of Federal Reserve Presidents are scheduled to speak today but the only speeches that we are interested in are the ones from FOMC voters Lockhart and Pianalto. According to Atlanta Fed President Lockhart, the immediate outlook for labor market is the main focus of the central bank. Cleveland Fed President Pianalto will be speaking this afternoon at 5pm ET in Ohio.

Kathy Lien
Managing Director

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