By 2018-03-29 InMoney

Euro Weekly 29 March 2018

After last week’s positive indications from the Bank of England MPC meeting and an increase in retail sales by 0.8% in February, the pound started the week well. Now that the timetable for Brexit has been agreed, it seems to have made some room not only for the negotiations, but for the pound to make gains as well – although much still depends on the outcome of those negotiations. Rating agency Moody’s was supportive of the pound on Monday. It said in a statement that “greater clarity on the post-Brexit transition arrangements is credit positive” in the short term for UK borrowers. Given the inherently short-term time horizon for most FX decisions, investors chose to ignore the other bit, which noted that Brexit could in the longer run “have substantial negative consequences”. The figures aren’t quite bearing that out at the moment; the BBA reported yesterday that UK mortgage approvals were down by a monthly 11% in February to just over 38k, a thousand fewer than expected.

It is never a surprise to hear Jens Weidmann, the Bundesbank president, press his case for an end to quantitative easing and a tightening of monetary policy by the European Central Bank. His comments yesterday were theoretically positive for the euro but were dulled by repetition. The head of Germany’s central bank said in Vienna that “markets see a first rate hike around the middle of 2019, which is probably not entirely unrealistic”. As for bringing an end to asset purchases by the ECB, “it’s so important to actually start [doing that] soon.” Because it is a litany that has been repeated often by Herr Weidmann, investors could not get excited enough to pile into the euro. However, his name is in the frame to replace Mario Draghi as ECB president at the end of next year. In that context, his hawkish views cannot be ignored. This is particularly the case given that, according to the European Commission, the Eurozone consumer confidence index has remained at 0.1 in March 2018, unchanged from February 2018. It was in line with markets’ expectation of 0.1. The index, which measures consumers’ confidence in the economy, has mainly remained flat due to lower economic activity and investor confidence.

The US dollar was impacted by the rumbles of a possible trade war with China, and that had knock on effects not only on the greenback but also across the world. US treasury secretary Steve Mnuchin stated last week that “We’re not afraid of a trade war, but that is not our objective”. Investors would like to believe him but they have yet to be convinced. Having kicked off with the imposition of protectionist tariffs on every country, Donald Trump has now offered at least temporary exemptions to all but China. The focus is clear and China knows it. Those fears of a trade war between the US and China subsided as the week went on. After due consideration financial markets decided to take the US treasury secretary at his word. He told an interviewer that “I’m cautiously hopeful we reach an agreement” with China. The Chicago Fed’s national (US) activity index jumped from 0.02 to 0.88 while the Dallas Fed’s index of manufacturing activity dropped from 37.2 to 21.4.

The Canadian Dollar has been the developed world’s worst performer against the US greenback in 2018, down by 2.5% against the US Dollar for the year to date, which is a steeper fall than those experienced by the beleaguered Australian Dollar and Swedish Krona, both of those being the only other G10 currencies to cede ground to their US rival this year. This is against a backdrop where the Bank of Canada has matched its southern neighbour by raising interest rates on one occasion thus far in 2018 and where prices of crude oil, Canada’s largest export, have continued their ten-month long climb. Much of this comes from elevated fears over the future of the North American Free Trade Agreement, due to US President Donald Trump’s objections. As the situation stands, analysts are predicting just one further rate hike from the Bank of Canada this year, although that may change if a trade war is averted.

Australian new home sales fell 0.7% in March after declining by 2.1% the previous month. As elsewhere, fear of a trade war between the US and China has had the biggest impact this week; the pound made gains as the market assessed the possible ramifications, a trade war could impact exports of iron ore to China and have a knock on effect on the Australian economy.

Together with a new governor, Adrian Orr, the Reserve Bank of New Zealand has a new set of policy targets. A 1%-3% range for inflation is still in there but the bank must now also “contribute to supporting maximum sustainable employment”. The NZ dollar was slightly higher after the news. At 4.5% unemployment in New Zealand is close to its lowest level in nine years and does not, therefore, pose an obstacle to higher rates. That is absolutely not to say a rate increase is imminent but it will mean that investors pay more attention than before to the NZ jobs data. The Kiwi is one of only two currencies to have strengthened against sterling since Friday morning, adding half a cent. A narrowing of New Zealand’s trade deficit contributed to that gain.

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