The U.S. dollar is trading higher against all of the major currencies this morning and kicking 2014 off with a bang. Unfortunately the sell-off in stocks is a reflection of nervousness at the start of the year. Both the euro and Swiss Franc have been hit hard by the slowdown in Chinese manufacturing activity and the price action of EUR/USD signals a potential triple top. USD/JPY hit a 5 year high right before the North America open but has pulled back since. The rally in USD/JPY has been slow but as long as the currency pair holds above 104, the uptrend remains intact.
In our 2014 U.S. Dollar Outlook, we said this year is America’s time to shine and based on the latest economic reports, the U.S. economy is indeed outperforming the market’s expectations. While the ISM manufacturing index dropped from 57.3 to 57.0 in the month of December, economists had been looking for a steeper decline to 56.8. Strong gains were seen in employment and new orders. Construction spending also beat expectations, rising 1.0% in November from an upwardly revised 0.9%. The jobless claims forecast was for a rise to 344k but instead, claims dropped to 339k from 341k. These reports indicate that the U.S. remains on track for a stronger recovery in 2014.
In contrast, manufacturing activity in the U.K., China and Australia slowed in December and the more dramatic slowdown that we expect to see in Chinese growth this year should make U.S. assets more attractive. Over the past decade, money has flowed out of Western into developing nations in seek of greater growth opportunities. While China will still grow at a faster pace than the U.S. in 2014, the slowdown in momentum will make investors nervous about leaving their money parked in the East and wary about missing out on opportunities in the West. As such, the slowdown in Chinese manufacturing activity is contributing to the sell-off that we are seeing today in equities and currencies. Among developed nations, Australia is one of the countries hit the hardest by slower Chinese growth and we are beginning to see evidence of that in last night’s PMI report which showed manufacturing activity slowing for the second month in a row.
Meanwhile the decline in manufacturing growth in the U.K. caught many traders by surprise because a similar survey conducted by the Confederation of British Industry showed a significant uptick in manufacturing activity. Nonetheless the more closely followed factory activity report dropped from 58.1 to 57.3 in December. On New Years Day Prime Minister Cameron called the U.K. recovery fragile and while today’s drop in PMI reinforces this view, the details of the report were not nearly as worrisome because employment, new orders and new export orders continued to grow.
The final Eurozone manufacturing PMI report confirmed that manufacturing activity expanded for the 6th month in a row. Weakness in France was offset by strength in Germany, Italy and Greece. It is encouraging to see manufacturing activity expand in the Eurozone’s largest economy but the unevenness of the recovery is one of the main reasons why we expect the euro to underperform the dollar this year. 1.35 is now in sight.