Morning Report: 4 December 2015

4th December 2015 By: Ranko Berich

GBP Yesterday’s disappointing ECB conference reverberated across currency markets, and sterling ended up strengthening against the US dollar, while falling back against the euro. The fact that the UK’s Services Purchasing Managers Index was rather strong in the morning was largely lost in the turmoil, but the index rose to 55.9 in November. This shows a strong rebound is occurring in the UK’s largest and most important business sector. Of course, the proof remains in the pudding for monetary policy in the UK and no major change in sterling’s fortunes is likely until this growth filters through to even higher wages and inflation. No data will be released for sterling today, but judging by sterling’s reaction to yesterday’s euro events, this will be no barrier for more volatility.

EUR The euro was at the centre of yesterday’s market moves, as the European Central Bank cut its deposit rate and extended the duration of its quantitative easing programme. Despite this easing in monetary policy the euro actually strengthened across the board, rising more than an astounding 3.5% against the US dollar. The fact the euro strengthened after a deposit rate cut shows just how toweringly high expectations were for the ECB: markets had priced in far more aggressive easing, and the euro strengthened when traders realised Mario Draghi would not be delivering. As for the actual press conference itself, the ECB noted the increased downside risks to inflation and cut its forecasts for 2016 even further. In fact, we could see further easing over the coming months. Above all, Yesterday’s events demonstrated just how volatile G10 FX can be when expectations of monetary policy reach fever pitch.

USD Despite a strong batch of fundamental data and an upbeat testimony from Janet Yellen, the US dollar weakened yesterday as the difference between prevailing asset yields in the eurozone and the US narrowed and the euro strengthened rapidly. In addition to another week of very low initial jobless claims, monthly Factory Orders data showed an impressive 1.5% spike in October as transportation orders surged. All of this data- and indeed all of the data released in the past month-pales in significance compared to today’s Non-Farm Payrolls release. With markets still not having fully priced in an interest rate hike this month- the implied probability is only around an 80% chance of a hike at the moment- a strong number would almost certainly help the greenback regain some ground. After ADP estimated job creation to be 219,000 last month the signs do seem to be positive, but Non-Farm payrolls are notoriously unpredictable. Whichever way it goes, the 13:30 GMT release seems sure to spark more volatility, particularly as a bad reading would really put the cat amongst the pigeons. In addition to headline jobs creation, the rate of wage growth will also be crucial. After Fed Chair Janet Yellen affirmed her opinion that the economy is in good shape and rate hikes will be necessary in the near future, strong wage growth combined with solid job creation would all but seal the deal for a rate hike in December.

CAD The Canadian dollar caught somewhat of a break yesterday, strengthening as the US dollar weakened due to events in Europe. For today, Canadian Labour Market data will be released at the same time as the US Non-Farm Payrolls report, at 13:30 BST.

UK News

  • FT. Private sector pension deficit rises to £244bn: The combined deficit of thousands of private sector pension schemes swelled to £244bn in the year to the end of March, its largest level in a decade, according to official figures.
  • Guardian. UK services growing at encouraging rate for economy: Growth in purchasing managers’ index, a guide to health of service sector, has been a key engine of Britain’s economic recovery, say analysts.
  • Reuters. UK house prices to rise 4-6 percent in 2016 – Halifax: British house price are likely to rise more slowly next year, with prices increasing by between 4 and 6 percent compared with growth of nearly 10 percent in the past 12 months, mortgage lender Halifax forecast on Friday.
  • Reuters. Moody’s says Brexit would hurt UK economy, benefits unclear: Ratings agency Moody’s said on Thursday that a British exit from the European Union would hurt the country’s economy by damaging trade and investment and could put its credit rating at risk of a downgrade.