British Pound Tumbles Despite Strong Employment Data From an academic perspective, the UK docket was encouraging this past session. You wouldn’t know it from the Pound’s performance however. The currency dropped against most counterparts – only keeping its balance versus more severe losses for the US and Canadian dollars. Fundamentally, the improvement in the employment statistics is reassuring for rate hikes. The drop in jobless claims last month may have been the smallest since May of last year, but they are still falling. Furthermore, the ILO unemployment rate for August dropped to a six year low. And yet, hawkish expectations were still burning. The 2-year Gilt yield plunged 14.7 percent this yesterday to a 8-month low and the 1-year-2-year swap collapsed 15.7 percent to an 11-month low. If global growth slows, rate hopes cool everywhere…especially for the most hawkish. Euro Financial and Sovereign Risks Creep Back In A dovish monetary policy bearing from the ECB has driven the Euro to massive declines over the past four months. However, the impact this relative effort has had and will have pales in comparison to what would happen if confidence in European markets soured. Given the wave of capital that flooded the region during the yield-chase years after the ECB vowed to do whatever was necessary to stabilize the Euro zone after its crisis (2012 to 2014), the dam is attempting to hold back a flood of liquidity that could soon seek safety. And, the cracks are growing. We’ve already noted the drop in interest/exposure for proxies like the Vanguard/FTSE Europe ETF. A new facet to this situation is the rise in Yields for the periphery Eurozone. A reflection of demand and confidence, Greece’s yield in particular has soared this week as the country has backtracked on its claim that it would rely solely on the market for its funding needs. Japanese Yen Mixed on a Strong Risk Aversion Day… USDJPY may have dropped Wednesday, but that was a move that was more indicative of the Dollar’s drop rather than the Yen’s rally. Most of the yen crosses were little changed or slightly higher on the day. Given the carry trade implications these positions have, risk aversion should be driving them lower. As the sentiment continues to clear cut through its glut on low-yielding, expensive exposure; these pairs will conform. In the meantime, the Deutsche Bank Carry Harvest Index is trading at a 7-month low having dropped 3.7 percent since September’s high.
Posted on: Fri, 17 Oct 2014 03:59:18 +0000
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