Euro Weekly 29 June
The slightly more hawkish approach of the Bank of England Monetary Policy Committee last week gave the pound a slight boost. This optimism wasn’t carried into the beginning of this week, with sterling having given back most of its gains by last Friday. On Wednesday, the release of the Financial Stability Report gave a boost to the pound, having struggled after Tuesday’s appearance of the dovish Jonathan Haskel from the MPC at the Treasury Select Committee. The report covers the Financial Policy Committee’s assessment of the outlook for the stability and resilience of the financial sector and any suggested policy actions to reduce and mitigate risk. Mark Carney acknowledged that Brexit posed a risk and more work was required to avoid disruption. He highlighted that stress tests show that UK banks could withstand a deep recession – including a disorderly Brexit. In addition, he pointed to the technical working group established to address the issues and the ability of parliament to legislate for changes where required. As a result, the pound recovered against the euro and the US dollar after a flat start. However, the good mood didn’t last long. On Thursday, the pound has hit a 3-month low against the euro and a 7.5-month low against the US dollar. There are fears in the market that the pound could drop lower as the pressures weighing on sterling continue to mount. Deputy Governor of the Bank of England Jon Cunliffe expressed his concerns over the impact of household debt. This follows on from a warning earlier in the week from business leaders in the US, Canada, Japan and India that failure to solve the Brexit issue could put more than £100bn worth of trade at risk.
EU heads of government met yesterday and will meet again today to discuss a raft of issues ranging from migration to structural reform. Brexit might have made it onto the agenda if the British government had put forward a sensible proposal. From the point of view of investors the most important aspect of the meeting will be Angela Merkel and whether she is able to win the support of her colleagues. IFO’s measures of German business confidence were just about on target, but without further support, her position as chancellor of Germany would look yet more precarious, as would the euro.
On the trade war front the latest from the White House is that Chinese investment in the States will be more tightly restricted. The president had said earlier that “all countries” must remove protectionist tariffs or be met with “reciprocity” by the US. Investors found a degree of irony in that demand and it did not endear them to the dollar. Investors were spooked by Trump’s proposal to restrict investment in US companies, ostensibly in order to protect intellectual property. They were spooked again when US motor cycle maker Harley-Davidson said it would move some production out of the United States to circumvent new EU tariffs. White House trade advisor Peter Navarro jumped in to steady the ship, saying the investment restrictions would not apply across the board. His contribution did halt the slide in share prices. However, Donald Trump stated Harley-Davidson will be “taxed like never before” if the firm moves motorcycle production abroad. The US president has dropped his threat to use emergency powers to restrict Chinese investment in American companies. Instead, decisions will be made by the Committee on Foreign Investment in the United States (CIFIUS). In theory this should alleviate market nervousness about mounting protectionism.
Data released late last week showed Canadian retail sales falling by a monthly 1.2% and core inflation slowing to 1.3%. Both were well below forecast and investors saw the numbers as a disincentive to higher interest rates from the Bank of Canada, which isn’t good news for the Loonie. Further dismay came when Bank of Canada governor Stephen Poloz addressed the Greater Victoria Chamber of Commerce yesterday, confirming that the US trade war will affect interest rate decisions. That ought not to have come as a surprise to investors but they were bound to infer that the decision on 11 July will be the first to be affected. From there it was no great leap to the conclusion that it would make an increase less likely. Until recently there had been an odds-on chance of an increase in July: today that chance is no better than 50-50. The Canadian dollar fell more than half a US cent on Mr Poloz’s words. It recovered more than half that loss over the following couple of hours but was still a touch lower on the day against the Greenback. The Loonie picked up a cent and a quarter from sterling, which was unchanged on the day against the euro.
Down under, the New Zealand dollar hasn’t had a good week, having reacted badly to a decline in business confidence. It was no surprise that New Zealand’s central bank held interest rates at a record low of 1.75% but signalled it is prepared to cut them if needed as economic growth slows and inflation remains below target. The Reserve Bank of New Zealand Governor Adrian Orr had previously said in May that the rates were likely to remain at their current level for some time to come, but weaker than expected growth and business confidence dropping to a seven-month low have caused the change in approach.
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