Dutch referendum keeps pressure on Sterling...

Week Commencing Monday 4th April 2016

Overriding Market Themes

We start this week in the US, where the US economy added 215,000 jobs in March, slightly less than the result in February where 242,000 jobs were created. The US unemployment rate was at 5 percent, the first month over month increase since May 2015. Before the results on Friday, some economists had been concerned about a setback in the steady month on month growth of the US labour market. However collapsing oil prices and doubts that a slowdown in China will impact global trade do not appear to have impacted hiring so far. The news is likely to bolster the Federal Reserves case for further interest rate rises, although the Federal Reserve chair, Janet Yellen, said this week that the central bank is likely to slow the pace of rate hikes this year. Overall, economists had expected the US economy to grow by 205,000 jobs and the unemployment rate to remain unchanged at 4.9%. The US economy had created on average 209,000 jobs over the first quarter of the year.

Over in Argentina, President Mauricio Macri has won approval for a repayment deal which should put an end to the country’s 15 year battle with holdout creditors. The deal, which has already been approved by the lower house of Congress, is the cornerstone of new President’s plan for revitalizing an economy stifled by low investment, high inflation and dwindling central bank reserves. The country has until the 14th April to pay USD 4.65 billion to the main hedge funds that fought the previous incumbent and won the settlement after fretting over steep payment reductions offered in Argentina's 2005 and 2010 bond sales. The deal allows Argentina to issue up to USD 12.5 billion in new bonds. Locked out of the capital markets since its 2002 default, Argentina desperately requires international financing to close its massive fiscal deficits, improve infrastructure and start rebuilding investor confidence.

Finally back on home soil, Sterling fell to a 15 month low against the euro after Markit's latest survey of the manufacturing sector showed orders fell from several of the UK’s major export partners, including the US and Continental Europe. Economists have warned that uncertainty surrounding the upcoming EU referendum would exert further pressure on this sector (and others) ahead of the referendum on June 23. The manufacturing PMI stood at 51 in March, which while slightly above February's reading of 50.8, remained close to the 50 mark that signals stagnation and below economists' expectations of 51.2.


GBP This Week

Wednesday’s Dutch referendum will likely ensure that this week’s focus remains on the UK’s referendum on EU membership. The referendum surrounds whether the Netherlands will vote to support or reject the EU’s association agreement with Ukraine, a pact that deepens economic and political ties with the former Soviet republic and is already ratified by the EU’s other 27 member states. Some officials said a Dutch “no” vote could work to the advantage of Eurosceptic groups across the region.

In terms of other data releases, we expect Services PMI to drop slightly on the month, potentially down to 52.5. Industrial output should increase 0.3 percent on the month while manufacturing output should drop 0.2 percent. All in all, an exciting week for good old Sterling!

USD This Week

The main events of the week will likely be the FOMC minutes on Wednesday and ISM non-manufacturing on Tuesday. We expect the minutes to provide some context into Yellen’s extremely dovish tone at her recent policy statement, while also shed light on the split between those who prefer a more aggressive hiking path versus the doves. The ISM should tick up to 54.0 in March, a somewhat modest increase from the 53.4 print seen last month.

We remain neither bullish or bearish on the Greenback this week, with it continuing to suffer against a recently emboldened Euro. Sterling retains some strength, with it continuing to maintain itself above the 1.41 level.

EUR This Week

We are likely to see better than expected Euro data out this week, however ECB shenanigans and geo-political risks are likely to stifle the single currencies recent bullish form. We forecast German February factory orders to increase 0.5 percent on the month while Industrial Production should fall 1.0 percent on the month. French Industrial Production should fall 0.2% percentage points on Friday.

As above, the geo-politics surrounds the Dutch referendum on Wednesday. A decisively negative tone from voters regarding Ukraine would signal a win for Eurosceptic, and as such may well work against the Euro in markets (perhaps with the exception of Sterling) and provide some short term weakness to the currency.



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