Equities rise to fresh cycle highs; US dollar sell-off continues

Tom Tong03/Μαΐ/2011Currency Updates

Equity markets worldwide are unfazed by the downward revisions to economic growth, and once again broke to new highs for this business cycle (though most markets remain considerably below their pre-crisis highs). Both their rally and the continued record lows in the US dollar were driven last week by the dovish message from Ben Bernake’s first ever press conference after the Fed meeting on Wednesday. The Chairman made it clear that he considers unemployment to be unacceptably high and the recovery disappointing; unlike the ECB, he’s sanguine on inflation and expects the effects from higher commodity prices to be temporary. After these statements the US dollar resumed its downward slide and risk assets displayed diverging performances: equity prices rose smartly, while commodities ended the week generally flat.


The combination of the royal wedding and a relatively sparse economic release calendar made for lacklustre trading in sterling. The main news was the confirmation that the UK economy grew about 2% saar on the first quarter. However, looking at the average for the last 6 months in order to see through the winter-related weather effects, it is difficult not to conclude that UK growth has stalled, and that it is doubtful whether it can restart given the fiscal headwinds from the austerity budget. In the absence of news, sterling resumed its role as a low-beta version of the euro and rose 1.2% against the greenback while losing 0.5% against the common currency.


Both the common currency and ‘Tier 2’ peripheral government bonds managed to ignore some fairly dreadful news flow out of Europe. This included persistent rumours that euro officials might be forced to acknowledge reality and restructure Greek debt; downward revisions to economic growth and upwards revision to deficit and debt from Greece, Ireland and Portugal, both actual and forecast; and the news that Spanish unemployment continues to rise and has yet to peak. Remarkably, Spanish spreads closed the week down 15 bp, and the euro joined in the generalized currency rally against the greenback to end the week up 1.8% against the dollar, closing the week above the 1.48 mark.


The first-ever post-meeting press conference by the Federal Reserve Chairman, Ben Bernanke, together with the release of first-quarter GDP numbers drove trading in the greenback last week. Neither of them were helpful to the beleaguered currency. Bernanke made it clear that unemployment and slack were the main concerns of the FOMC, not inflation; the latter was regarded as transitory in nature. The US GDP numbers seemed to confirm Bernanke’s concerns, coming out lower than expected at just 1.8%. This provided further confirmation that the recovery from the savage downturn of 2008-2009 remains disappointingly weak, the moderate improvement in the labour market notwithstanding. The lack of concern of US authorities over the dollar devaluation is thus understandable, as is the new sell off of the USD to another all-time low in trade-weighted terms.

Other G10

Macroeconomic releases out of Japan have been generally dreadful, including record drops in industrial production as proxies for retail commerce. However, this was largely expected by markets in the wake of supply chain disruptions from the earthquake and tsunami. In the absence of any catastrophic news from the Fukushima nuclear accident, the yen went back to form, trading in lockstep with US fixed income and rising 1% against the dollar for the week.

Another week, another record high in the Australian dollar. This time, it was buoyed not only by generalized dollar weakness, but also by the higher than expected Australian inflation, which has led most commentators to put RBA hikes back on the agenda. AUD was once again the start in the G10 world, rising nearly 2,5% for the week to end just below the USD 1.10 mark. NZD and CAD, meanwhile also rose, though a more modest 1%, weighed down respectively by the aftermath of the Christchurch earthquake and weaker-than-expected GDP growth in the still very much US-dependent Canadian economy.


Written by Tom Tong

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