Euro Weekly 18 May 2018
The pound was this week boosted by the potential certainty arising from the imminent government White Paper on Brexit. In addition, the previous month’s employment data gave some hope. Total earnings were up by an annual 2.6% and basis wages – excluding bonuses – rose by 2.9%. Both of those were on the right side of the 2.5% inflation reading.
Euro zone inflation slowed in April, Eurostat confirmed on Wednesday. Inflation in the 19 countries sharing the euro currency was unchanged at 1.2% in April. While ECB policy makers debate whether to phase out their monetary stimulus package, their target of close to 2% is proving rather elusive and no change is expected in ECB policy in the near future. Germany also announced unchanged inflation rates of 1.6% (CPI) and 1.4% (HICP).
The threats about tariffs and counter-tariffs on American imports and exports continue to fly around. But despite a 20% tax on automobile imports mooted by the Wall Street Journal and Donald Trump’s proposed support of Chinese electronics manufacturer ZTE, which is suffering as a result of US sanctions, there was no concrete action. The drama doesn’t seem to be harming the greenback and suggestions that the US dollar’s rally is coming to an end might be premature. On Tuesday it shared first place for a second successive day, this time with the Swiss franc. There is a correlation, at the moment, between US Treasury bond yields and dollar strength. For a couple of weeks the yield on 10-year bonds has been flirting with the 3% level. Yesterday it hit 3.08%, marking a seven-year high, and the DXY dollar index touched its best level since the beginning of January. At 3.08% treasuries offer a better return than any other major currency (Germany/euro 0.63%, Britain 1.51%, Switzerland 0.07%, Japan 0.05%), hence the appetite to buy dollars with which to acquire them. Another factor helping the dollar was the 0.3% rise in retail sales – not a dramatic number but enough to keep the dollar flying high.
Canada’s employment figures for April came as a surprise to the market; the loss of jobs and the 30,000 shift from temporary to full-time employment looked implausible. The Loonie appeared to take a tumble as a result of the confusion.
In a move that surprised no one, the Reserve Bank of Australia (RBA) Board agreed there was not a “strong case” for a near-term adjustment in monetary policy. The RBA last cut rates to 1.5 percent in August 2016; this is the longest period without change in modern history. It’s expected that the next move is more likely to be an increase, if the economy gathers the expected momentum.
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