Headlines
Inflation expectations hit 13-yr low
– UK election concerns weigh.
GBP/EUR hits fresh 7-yr high
– Euro bond yields at record lows.
US NFP report smashes expectations
– Sterling declines 2 cents vs. Dollar.
US labour data weighs on commodity bloc
– Weakens appetite for risk.
Sterling
The Pound didn’t have its best of days on Friday because a growing numbers of investors felt it necessary to hedge against the uncertainty of the upcoming general election by moving out of Sterling positions. There are widespread fears associated with both of the major parties; if Labour come out on top many feel that tough, but necessary, regulation of the financial sector could deter business investment; if the Tories win a second term in government then investors could become anxious at the prospect of a promised in/out EU referendum.
The only major economic report released on Friday related to the British economy showed that Britons expect inflation to rise from the current record low of 0.3% to 1.9% over the next 12 months. Despite the fact that 1.9% is only marginally lower than the bank’s 2.0% target rate, traders were not buoyed by the forecast because it marked the weakest outlook for 13 years.
Euro
The Pound to Euro exchange rate struck a new seven-year high on Friday as Eurozone bond yields continued to shrink ahead of the European Central Bank’s large-scale quantitative easing programme.
Data showed that the currency bloc expanded at a steady rate of 0.3% in the fourth quarter and by 0.9% overall last year but the economic reports fell in line with the market consensus and therefore failed to have a positive impact on the single currency.
European policymakers and commentators alike had a bit of fun during the afternoon at the expense of Greek finance minister Yannis Varoufakis, who laid out plans to employ part-time undercover tax agents. The proposal would see ordinary people ‘wired’ with audio visual recording devices milling about the country making purchases at establishments, which could then be checked against official bookkeeping records. The idea is that even the knowledge of such a scheme would scare business owners into publishing accurate records, and would therefore massively increase revenue from tax receipts.
Apart from the fact that Syriza explicitly set out to fight the so-called ‘fat cats’ and oligarchs – the most economically crippling members of the tax evasion community – the scheme was met with ridicule and derision from those who see the prospect of tourists acting as undercover agents as ‘hilarious, yet tragic’.
US Dollar
Sterling depreciated sharply by around two whole cents against the US Dollar on Friday in reaction to a headline-busting US non-farm payroll report. The key gauge of labour market activity showed that US employers added 295,000 new workers to their payrolls in February, smashing economists’ forecasts of 235,000, and bringing the unemployment rate down from 5.7% to 5.5%.
Although wage growth remained subdued at just 0.1% month-on-month, the fact that the six-month average is currently at a 15-year high of 293,000 suggests that the American jobs market is heading in the right direction. It is now anticipated that Federal Reserve Chairwoman Janet Yellen will move the ‘word’ patient from her next policy statement, with regards to the central bank’s rate hike outlook.
It is far from certain, but the possibility of a rate increase in June this year appears more-likely-than-not at this moment in time.
Canadian Dollar
The Pound initially declined against the Canadian Dollar on Friday but demand for the ‘Loonie’ plunged during the afternoon as investors reacted to the increased threat of higher borrowing costs south of the border. As well as the bumper US NFP report, the Canadian Dollar also responded negatively to a downbeat domestic building permit reading of -12.9%, which underwhelmed the median market forecast of -4.0%.
Australian Dollar
The lowest UK inflation expectations result for 13 years sent Sterling spiralling lower against the Australian Dollar on Friday morning. But risk sentiment took a turn for the worse when the US non-farm payroll report hit the newswires and this allowed GBP/AUD to recover its earlier losses as traders fretted over the prospect of tighter policy in the world’s largest economy.
New Zealand Dollar
Not one to buck the trend on this occasion, the commodity-correlated New Zealand Dollar also weakened following the glittering NFP numbers as markets recalibrated and priced-in the heightened potential of a Fed rate hike in June of this year. This weighed on the commodity bloc because it was seen to reduce the appeal of currencies that are dependent on global economic sentiment to attract investment.
Data Released Today
EUR Euro-Zone Sentix Investor Confidence (MAR)
CAD Housing Starts (FEB)