- Healthy profit taking in currency markets… but no change in trend
- Germany still set for moderate GDP growth in Q3, despite industrial weakness
- Job openings and turnover in the US confirm a strong labour market
Another round of US dollar strength is on the cards
From the start of July up until 3 October, the dollar index rallied strongly in almost a straight line. This was reflected by an 8.5% drop in EUR/USD and a 7.7% rally in USD/JPY. These strong directional moves were mainly the result of diverging monetary policies among the three major central banks. As a result, speculative positions were pushed into excessive territory. For example, net-long positions in the US dollar are at a record high, while net-short positions in the euro and the yen are also substantial (see graph). Although excessive positions will usually not indicate when a trend is about to change – as such state could continue for quite some time – movements could become more erratic or volatile. For example if a certain technical level halts the move, a part of the market could be motivated to take profit on open positions. This played out on Friday afternoon and on Monday. For example the 1.2500 level in EUR/USD proved to be a too hard a nut to crack. After investors tried several times to take out this level, they decided to take profit, which pushed EUR/USD up from 1.2501 (low on Friday) to 1.2675 (Monday evening). We judge that this was just a healthy profit taking wave after the recent strong moves seen. It is likely that the US dollar will rally strongly again in coming months. We think the key driver will be an an upward adjustment in expectations about the path of the Fed’s policy rates in 2015.
German industry hurt by shift in timing of school holidays
Industrial production in Germany fell by 4% mom in August, after it rose by 1.6% in July. The disappointing report created worries about the health of the German economy. We think that Germany’s industrial sector is being hit by the past rise of the euro and the Ukraine crisis. The recent fall in the euro means this factor will go from negative to positive going forward. On top of that, the August data have been depressed by a shift in school holidays from July to August in a number of Bundesländer, which was not captured fully in the seasonal adjustment of the data. Indeed, this year almost 100% of the German population had holidays during thirteen working days in August, whereas last year this was only during two working days. These facts combined suggest that production should have bounced back noticeably in September, and that it contracted modestly in Q3 as a whole. Since Germany’s services sector has been growing solidly during recent quarters, and the level of the services sector PMI suggests that this continued in Q3, we think that GDP expanded by around 0.2-0.3% qoq that quarter.
US job openings highest level since 2001
A string of US labour market reports has been released in the past days. September’s nonfarm payrolls report was strong and left little doubt that the labour market is on firmer footing. Meanwhile, August’s Job Openings and Labour Turnover Survey was released yesterday, which has acquired significance as a complementary measure of the labour slack in the economy. It showed that the number of job openings, used to measure labour demand, increased to 4.8 million compared to 4.6 million the previous month, now up 23% relative to a year-ago levels. Job openings in activities such as manufacturing, which were weaker in last Friday’s job report, remain strong. The other details of the report were more mixed. The hire rate was down (3.3%) compared to the previous months (3.6%), decreasing mainly in construction, with hiring in other industries was practically unchanged. Quit rates – one of the monthly “Yellen indicators” of the health of the labour market remained unchanged. We think that the Fed’s view on the labour market outlook will remain unchanged in the next meeting in October, but should gradually be upgraded in subsequent months.