Euro jumps above $1.20

May prompt even more dovish tone from ECB next week

Chart of the Day

The euro jumped by a further 1.2% against the dollar yesterday, taking it above the $1.20 mark for the first time since April 2018. Given the euro has been trading in the $1.16 to $1.19 range for several months now, that is not a huge deal in terms of the size of the move, but the rise above $1.20 is likely to raise many eyebrows among the ECB governing council, who generally see a stronger euro as a threat to the outlook for eurozone exporters. All this further raises the chance that the ECB will present a very dovish message next week, and may explicitly try to talk the single currency back down.

Macro

The US ISM manufacturing index dropped back in November, although its relatively high level implies that manufacturing output should continue to recover from the deeply negative -5.9% YoY seen in October.

US construction spending has held up a lot better than overall manufacturing, but the data yesterday confirmed that the overall picture masks big differences between residential spending, which is soaring, and non-residential spending, which is weaker YoY.

The flash euro-zone data showed core inflation unchanged at a very low 0.2% in November.

While the China business surveys are often a good proxy for global manufacturing demand, it is worth paying attention to Sweden as well given the small open economy exports lots of high-tech capital-intensive goods. The further rise in the manufacturing PMI there in November is therefore also a good sign for global demand.

Two commodity exporters, Australia and Canada, both released Q3 GDP data yesterday. Canada recorded the stronger gain QoQ, but in YoY terms it is Australia that is doing much better.

Markets

That slightly worse performance from Canada may help to explain why the currency has only returned to its pre-virus rate against the USD, whereas the Australian dollar, and the New Zealand dollar, are both higher than they were at the start of the year. All three have been doing well recently.

US government bonds sold off yesterday, with yields jumping across the curve, although they still remain lower than a few weeks ago.

The jump in yields may have reflected the latest signs that a new US fiscal deal is on the cards. Who knows whether that will materialize, but the rebounds in gold and silver could also reflect higher stimulus expectations.

Likewise, the further strong gains in copper and iron yesterday suggest investors are becoming more optimistic on their demand prospects.

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