Morning Report: 29 April 2015

29th April 2015 By: Ranko Berich

GBP Despite the UK announcing below-expectation GDP data for Q1 this year yesterday morning, at 0.3% against a 0.5% forecast, markets eventually shrugged off the news, with the pound actually recording new highs against the US dollar, to record its longest winning streak in almost a year against the greenback. Although the US dollar has been in decline in general in recent weeks, sterling also recovered all of its intraday losses against the euro, which was particularly surprising, given that the underlying data from the GDP figures was weak almost across the board. Construction tumbled by 1.6%, and growth in manufacturing and the service sector slowed sharply. The news was seized upon by shadow chancellor Ed Balls, who claimed that the figures showed “working families could not afford another five years of a Tory government”. With the general election already set to be one of the closest in history, the news comes as a blow to the incumbent Conservative government, whose strong economic record is a key element of their campaign platform. Despite this, markets seem happy to side-line the importance of any potential political inertia over the coming weeks, and, for now, keep buying in to the pound.

EUR The euro saw no data of significance released yesterday, however a report from both ING and Citigroup did provide an interesting insight in to the longer term prospects for the single currency. Historically, when a major currency weakens for an extended period of time, it is met with intense political opposition from countries whose export sector loses out as a result. In the case of the euro, chief amongst these tends to be the eastern European economies, who almost universally rely on the EU as their biggest trading partner. However, over recent months, the eastern European economies have been remarkably silent about their currencies rise in strength. The reason was explained by Piotr Kalisz, Citigroup’s chief economist in Poland, who highlighted that as the euro is also falling against the US dollar, exports from Europe to the US have been given a boost. As the eastern European economies tend to be part of the supply chain, “we’re benefiting from the cheap-euro effect and much bigger competitiveness of the euro area”. This means that policy makers in countries such as Poland, Hungary, the Czech Republic and Romania are likely to remain content with a weaker euro, removing one of the traditional medium to long term pressures for policy makers to help the euro regain in value.

USD Poor consumer confidence data from the US yesterday was the latest in a long line of reasons to convince traders to sell out of the US dollar, as the greenback heads for a decline for the fifth straight April in a row. As the price of oil clings on to its recent gains, the news that consumer confidence had dropped to its lowest level this calendar year compounded a string of disappointing data last week, ahead of this afternoons release of the all-important GDP figures. Markets have already priced in a sharp drop from last quarter’s 2.2% reading, with poor weather at the beginning of the year expected to drag the Q1 reading down to 1%. This evening, only a few hours after the release, the Federal Reserve are due to conclude their two-day monetary policy meeting, where, though rates themselves will almost certainly stay put, further clues should be given as to when any future interest rate hikes may occur. As a consequence, today is likely to be a volatile day for the US currency.

CAD The Canadian dollar remains on the front foot against the US dollar, as oil prices remain over 20% higher than the March lows. The strength comes despite Bank of Canada Governor Stephen Poloz reaffirming yesterday that the BoC do not believe that the Canadian housing market is in a bubble, despite being 20% overvalued even by the Bank’s own estimates. Poloz claimed that the long-running boom in housing prices hasn’t been marked by speculative investments, that are a traditional sign of an asset bubble. Instead, Poloz claimed that the boom had been in line with “demographic demand- there is no excess”. This removes a key argument against the Bank of Canada further easing monetary policy- that they wouldn’t want to ease monetary conditions for fear of further fuelling an asset bubble. With no headline data from Canada due out today, markets are likely going to focus on developments in the US and oil markets for further direction.

UK news

  • BBC. UK economic growth slows to 0.3%: The rate of economic growth halved in the three months to the end of March, official figures show, marking the slowest quarterly growth for two years.
  • Reuters. UK consumer confidence falls as election nears – YouGov/Cebr: British consumer confidence fell this month for the first time since December, according to a survey that will disappoint Prime Minister David Cameron ahead of next week’s national election.
  • Reuters. UK house price growth hits 10-month high in April: British house prices rose at the fastest monthly pace since June last year, a survey from mortgage lender Nationwide showed on Wednesday in another sign that the housing market might be starting to regain momentum.
  • Reuters. Osborne says economy at “critical moment” after Q1 slowdown: Britain’s economy is at a “critical moment”, Chancellor George Osborne said on Tuesday after official figures showed growth fell sharply in the first three months of 2015, just days before Britons go to the polls.