Short EUR/USD remains our biggest position with a 25% allocation. Slightly softer than expected activity data in the US (particularly in the ISM manufacturing survey) and weaker than expected PMI data from China have in the short term helped risk sentiment by reducing the risk of more tightening measures. Combined with the announcement of additional austerity measures from Greece, this has meant the momentum in the euro has slowed in the short term. We thought the euro might have had a bigger correction to EUR/USD1.3800 on this news in the short term. We still target 1.24 by year-end and have left the euro position unchanged.
Divergence Gap Widening
The divergence between leading indicators and real economic data remains wide, leading to broader uncertainty about the macro backdrop. Against this backdrop, it is easy to see why investor sentiment has been fickle. As Exhibit 3 shows, the average of PMI data across major economies is at elevated levels and may be perking back up after having stabilized over the past couple of months. In contrast, real economic data have painted a more inconsistent picture, particularly in the US. This is most evident in US labor market data, as the economy has yet to shift from job-destruction to job-creation mode (Exhibit 4).
Coiled for Spring
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