FX: U.S. Data, Not Bad

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The U.S. dollar is trading higher against all of the major currencies this morning on the back of better than expected economic data. According to the ISM report, service activity accelerated in the month of November as the ISM index increased to 54.7 from 54.2. Although the employment component of the report fell sharply, signaling slower job growth in November, the increase in service sector activity suggests that Hurricane Sandy did not hit the economy as hard as some may have initially feared. Business activity surged thanks to stronger demand for autos and record Black Friday / Cyber Monday sales. Manufacturing activity also beat expectations with factory orders rising 0.8% against a forecast for flat growth. According to payroll provider ADP, U.S. companies added 118k workers to their payrolls last month. While this increase was less than expected, above 100k payroll growth is not bad considering the factors that could have curtailed hiring including Hurricane Sandy effects, President Obama’s policies and Fiscal Cliff concerns. Overall today’s reports will ease some concerns about an abysmally weak non-farm payrolls report on Friday and the continuation of weak job growth thereafter.

Meanwhile, the euro is weakening against the U.S. dollar for the first time in 6 trading days. An extremely large 1.2% decline in Eurozone retail sales and 16bp increase in Spanish bond yield have contributed to the selling. Yields in the peripheral and seemingly stronger nations on the other hand continue to fall with 10-year French bond yields dropping to a euro-era low. The British pound is proving to be extremely resilient in the face of weaker service sector activity and cautionary comments from U.K. Chancellor Osborne who delivered his Autumn statement this morning. The Chancellor announced major cuts to the government’s GDP growth forecasts. They now expect the economy to contract by 0.1% in 2012, versus a forecast for 0.8% growth back in March. For 2013, they expect 1.2% growth in 2013 versus a prior forecast for 2% growth. While the Chancellor stated that, “it is taking time but the economy is healing,” it is clear that they believe the outlook is grim. A number of other changes were also announced including higher taxes on the wealthy, corporation tax cuts, benefit caps and the removal of the 50-year maturity cap on Gilts.

Kathy Lien
Managing Director

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