Don’t get fooled again

Since my last post on here, we have had ECB and Fed communications. While Draghi managed to sound concerned enough about the recent data and weak inflation outlook to send EUR/USD down around 1.5 figures, and get about 80% of analysts looking for a deposit rate cut in March, the Fed statement was only marginally more dovish than last time, downgrading domestic demand growth to “solid” from “moderate”. Both expressed some concern about weaker energy prices and the effect on inflation and inflation expectations, and about weaker exports.

In the end, EUR/USD is back where it was before the ECB meeting, but it seems to me the economic assessments being offered here are a little topsy-turvy. Has there really been much change in the Eurozone picture since December? Sure, the January business and economic climate indicators have dipped to the lowest since August, but then December was the high of last year, so the level isn’t particularly worrying, and sentiment may well have been affected by the equity market tumble at the beginning of the year rather than anything concrete. Inflation is a little weaker than expected, but essentially because of lower oil prices, and these have now bounced a bit.

Draghi’s downbeat assessment in January “heightened uncertainties regarding developments in the global economy, as well as to broader geopolitical risks. These risks have the potential to weigh on global growth and foreign demand for euro area exports and on confidence more widely.”

Draghi’s downbeat assessment in December  “heightened uncertainties regarding developments in the global economy as well as to broader geopolitical risks. These risks have the potential to weigh on global growth and foreign demand for euro area exports and on confidence more widely.”

So these aren’t really new concerns, and while a strong majority seems to think they cut the depo rate in March, it seems a bit previous to assume this given pretty limited data, and given the fairly implacable opposition from the conservative wing of the ECB last time. cCan the market really take the same stance as last time after getting so badly burnt? Not without more convincing data would be my view.

In the US, the data has been fairly universally disappointing including today’s durable goods report, but manufacturing is especially weak. Employment is, however, holding up, though the market never seems to acknowledge that employment is typically a lagging indicator. Tomorrow’s Q4 GDP release is expected to come out at just 0.8% annualised – that’s 0.2% in q/q European terms. The Fed seems fairly immune to the weakness of the numbers, partly because they tend to get revised a lot, but on the basis of the numbers alone there really isn’t a case for thinking about another rate hike in H1. If employment growth ever catches up with this growth weakness in a real way we can forget about another hike this year.

In summary, it’s early days, but right now I can’t see why the market would want to hold long USD positions against pretty much any of the majors. If you are looking for growth we’re not seeing it in the US – you are much better looking at Sweden. The long USD position is already well held on rate expectation grounds, so there is a limit to the USD’s safe haven appeal if growth is weak everywhere. The JPY or EUR would make more sense. But EUR/USD and USD sentiment are supertankers, so we may not see immediate USD weakness, and the higher EUR/USD goes the bigger the chance that the ECB do act, so EUR upside is likely to prove a bit of a struggle. But if the oil price continues to rally, the case for more ECB easing will be hard to make. So coming into the next ECB meeting – don’t get fooled again.


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