MORE GLOBAL FAULT LINES

MORE GLOBAL FAULT LINES
12/07/12 @ 07:14 GMT by Simon Smith, Chief Economist

The dollar and the yen have dominated overnight trading, with markets becoming more concerned about the fragility of the global economy. The Bank of Korea cut its key interest rate for the first time in three years, taking it down to 3.00%. This is notable because Korea is one of the more trade-dependent economies in Asia, exports accounting for half the economy, with China its main trading partner. Therefore, it’s exposed more than most to the ebb and flow of global growth and trade, which in part accounts for the relatively volatility of the Korean won. The won move was the third biggest of the year, reflecting the fact that the decision was a surprise and sparking fears that the authorities were more concerned than was previously thought to be the case. The dollar was supported into the New York close by the latest FOMC meeting minutes, which served to dampen expectations of further near-term quantitative easing. Meanwhile, the Bank of Japan chose to further expand its QE program, increasing its asset purchase fund to JPY 40trln to JPY 45trln.

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Commentary

Euro departing from stocks and bonds. There were some very interesting moves in FX towards the end of the European session, with EUR/USD departing from tracking both stocks and also the moves on Spanish bonds. Spanish yields were able to fall around 25bp on the day, whilst the close correlation between EUR/USD and US stocks was broken into the European close, reflecting the fact that there were more fundamental factors dragging the single currency lower. In the background, there remain concerns that Germany’s approval of the EU’s permanent rescue mechanism (the ESM) will take longer than previously thought as it becomes trapped in Germany’s constitutional court. Nothing’s ever easy.

Flashing economic warnings. It is widely recognised that the global economy is in another deep pickle. This series is a simple equally-weighted average of the Citigroup Economic Surprise index for each of the United States, the eurozone and China. Not since late 2008 and the early months of the following year have we been down at these levels. In 2009, US GDP fell by 3.5%; Chinese GDP fell back to +6.1% in Q1 of 2009; and eurozone GDP fell by more than 5% through the first half of that year. If the index measure we have calculated here is anything to go by, there is plenty of potential for growth expectations for the second half of this year to be revised significantly lower in each of the United States, Europe and China.

Aussie gives it all back. There were once again solid signs of Aussie resilience through Wednesday’s session but they were knocked sideways overnight by the release of disappointing jobs data which showed headline employment falling (for the second time this year) and the unemployment rate rising. The rate was recorded at 5.2% in June, up from 5.0% two months ago. The news knocked the Aussie back below the 1.02 level and near-term it may struggle to get much above the 200d moving average, currently 1.0271. With the euro still languishing, EUR/AUD is below 1.20 and GBP/AUD is under 1.52. The overnight decline aside, the healthy tone of the Aussie has been a standout feature of recent sessions. However, as we have been intimating recently, these levels will be very difficult to breach from a technical perspective.