Risky assets end the week flat as dollar gives back recent gains

Tom Tong31/May/2011Currency Updates

After a shaky start to the week, equities and risk assets in general found their footing Thursday morning and staged a modest rally that brought equities back to unchanged and commodities to slightly up for the week. However, in further signs that the economic slowdown in the US and the unresolved Greek crisis in Europe still weigh on investors’ minds, credit spreads in general widened in the week and ultra-safe Treasuries and Bunds staged an impressive rally, with 10 year Treasury yields very close to dropping below 3.0% and German 10-year yields already below that level. The tug of war between increasing signs of economic slowdown in the developed world and the asset-buoying power of ultra-low interest rates continues.


It is well known that the UK has become a key battleground in the debate over the effects and sustainability of aggressive austerity policies during the recovery from a deep recession. Last week GDP numbers were worrisome in this regard. Private domestic demand in the first quarter contracted at a rate of over 5% in annualized terms, and only a buoyant export sector prevented a second consecutive quarterly contraction in the UK economy. These numbers doubtlessly reinforce the position of the more dovish members of the MPC, and the chances of an August hike are looking ever more remote. The strong performance in GBP was therefore somewhat puzzling; sterling managed to ignore these developments to end the week up 1.5% against the dollar and 0.6% against the euro.


Given the lack of resolution of the second stage of the Greek crisis, the common currency is displaying remarkable resilience. The latest effort to shore up confidence in Greece is the announcement of a sped up schedule of privatizations and further fiscal tightening measures amounting to about 3% of GDP. Markets are sceptical as ever; given that the entire capitalization of the Athens’s bourse is under 40 billion euros and that the Greek economy has proven incapable to grow so far in the face of austerity messages, it is unclear whether these measures will make any difference. Greek bond spreads ended the week unchanged, whereas tier 2 peripherals (Spain, Italy, and Belgium) actually tightened slightly. Macroeconomic news continued to display a strong though moderating boom in Germany and France, with much softer conditions elsewhere. Overall, the euro appeared to pay little attention to either political or macroeconomic news, rising over 1% against the greenback for the week.


Further confirmation emerged last week of an on-going slowdown in the pace of US economic recovery from the Great Recession. GDP growth for the first quarter was unchanged at 1.8%, but the composition changed. Domestic sales were revised down, and inventory accumulation up. Those are not healthy changes. Further, durable goods orders declined sharply, Federal regional surveys slowed down severely, and weekly jobless claims remain stuck well above the 400,000 mark. None of this helped the dollar, which ended the week down nearly 1% in trade-weighted terms.

Other G10

Macroeconomic data confirms the dramatic slowdown in the Japanese economy in the aftermath of the earthquake disruption. However, the yen has decoupled almost completely from domestic data, and the old correlation with US rates has reasserted itself. As US yields dropped sharply last week, on the further confirmation of a US economic slowdown, the yen rallied to end the week up over 1% against the greenback.

The New Zealand dollar was the star of the week. Some hints that the economy is recovering faster than expected from the Christchurch earthquake, together with some news that China was interested in buying Kiwi bonds buoyed the NZD, which ended the week up in dramatic fashion.

The Swiss franc rallied relentlessly throughout the week, in contrast to other risk-aversion indicators that were either steady or down. It ended the week at new all-time records against both the dollar and the euro. The resilience of the Swiss export sector in the face of this appreciation is remarkable.


Written by Tom Tong

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