China and US macro news lift risk assets, as Euro makes gains.

Tom Tong17/Δεκ/2012Currency Updates

The main news worldwide was in a better tone, as we saw the macroeconomic data coming out in China and the US. Even Euro PMI’s managed a slight bounce, while remaining in deep contractionary territory. Risk assets generally reacted well, as equities rose, credit spreads compressed further, and ultra-safe Government bond yields rose somewhat.

Commodities were flat overall, as sharp falls in agricultural prices offset rallies elsewhere. In currency markets, the Euro followed risk assets, rallying sharply higher against the dollar and most major currencies, while volatility (both actual and implied) continues to trend ever lower.

We reiterate our opinion that these calm market days should be taken advantage of in order to to hedge currency exposure.


The recently designated successor to Mr. King at the helm of the Bank of England, Mark Carney, made headlines last week. He openly proposed that Central bank jettison the inflation targeting framework that (with the conspicuous exception of the Federal Reserve in the US) they have relied on for the last three decades. He justified his stance with the very poor performance of advanced economies and the UK’s in particular over the past few years, and the lack of prospects for any improvement in the near future. Instead, he proposed targeting nominal GDP levels, a framework which would lend similar weight to economic growth and price stability.

Although the speech will not have any immediate effects on policy, as Mr. Carney is not set to take over until July of next year, we think that this lends further support to our view that the BoE will continue expanding its balance sheet through additional Gilt purchases, and will also experiment with newer tools to provide further monetary stimuli to the economy.


The Euro benefited from the generally positive tone in risk assets, as well as from a slightly rebound in the PMI business sentiment indicator. The latter, however, remains in contractionary territory and masks wide divergences between Germany and most of the rest of Europe, as negative French sentiment is now at peripheral levels.

Other news was less positive, as industrial production shrank a larger-than-expected 1.4% mom. We continue to see no signs of a sustained rebound from Europe’s double-dip recession, and the improvement we are seeing in China and the US, while genuine, is not numerically sufficient to compensate the dramatic loss of confidence and demand shrinkage coming from the periphery and, increasingly, France.

Therefore, we remain highly sceptical of the Euro rally and would take advantage of its current levels near 1.32 dollars to hedge exposure to EUR.


Macroeconomic news out of the US are difficult to interpret, given the impact from Hurricane Sandy, but they seem to be painting a cautiously optimistic pictures. Retail sales rebounded 0,3% last month from their Sandy-impacted dip in October.

Industrial production also surprised to the upside, while weekly jobless claims fell to one of their lowest levels in the recovery. We will have to wait a few weeks before Sandy’s impact washes out through all this high-frequency data, but we are increasingly confidence that, as and when the fiscal cliff is averted, conditions are in place for a moderate acceleration in the pace of recovery from this year’s lackluster 2% rate.


Written by Tom Tong

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