Euro Weekly 11 October 2018
As usual, most of the pound’s focus was on Brexit but this week there was a greater sense of optimism than there had been in a long time. There is a sense that Downing Street moving closer to a deal with Brussels and the pound made gains to an average of 0.5% against its peer group towards the end of the week. Investors were heartened by news that Michel Barnier, the EU negotiator, believes that a deal can be done by the middle of next week. The caveat is that the Conservatives’ coalition partner, the DUP, reserves the right of veto. If it does not like the deal it will vote down the government’s budget at the end of this month. Were it to do so, a general election would be the likely outcome but the reaction from the market suggests that investors do not believe this is a likely outcome. Bank of England deputy governor Ben Broadbent was trying to persuade parliament to do away with redundant inflation indices, especially the retail price index, to which the Bank has an especially severe aversion. On the domestic front, manufacturing production unexpectedly fell by 0.2% in August, the trade deficit widened and GDP growth in August was zero but for now, all eyes are on Brexit.
Italy remains a thorn in the EU’s side, harrying the euro. Italy’s right wing deputy prime minister Matteo Salvini joined Marine Le Pen, his anti-immigrant opposite number in France, to have a go at the EU. Investors were not taken in by Sig. Salvini’s rhetoric. They are all too aware that it is his deficit budget plans and questions about the country’s continued membership of the single currency that have made Italian government debt a less attractive proposition. The situation there is of no help to the euro but it hasn’t made too much of a dent.
Although US unemployment did indeed fall to a 49-year low, the 134k monthly increase in nonfarm payrolls was well short of the forecast 185k rise. Investors did not care that, with revisions to earlier months, the total number of workers was 36k more than expected (149.5m in fact): the headline number was not up to snuff and that was that. The dollar lost a cent to sterling. The US – China trade war continues with some blunt words from China for Secretary of State Mike Pompeo and the White House hitting back by suggesting it wants to list China as a “currency manipulator” because of the way its currency has declined since the US president started a trade war intended to cripple its economy. Donald Trump broke presidential protocol once more by commenting on the actions of the US Federal Reserve with regard to steady interest rate rises. He stated, “I think the Fed is making a mistake. They’re so tight. I think the Fed has gone crazy.” He then backed off a little from that criticism, conceding that “It’s a correction that we’ve been waiting for, for a long time.”
A slump in the price of oil gave the Canadian dollar some difficulty midweek. It weakened on Wednesday to a 10-day low against its U.S. counterpart, underperforming other G10 currencies, as the price of oil, one of Canada’s major exports, slumped. During this period, the loonie touched its weakest since Sept. 28 at 1.3046. It then enjoyed a resurgence late in the week after the Canadian dollar rose against its broadly weaker US counterpart on Thursday, recovering from an earlier 12-day low as data showing a slowdown in US inflation weighed on the yields of US government bonds. The U.S. dollar held near its lowest levels in nearly two weeks after the inflation data and the Canadian dollar was a beneficiary.
It’s been a tricky week for the Australian dollar, but it managed to recover and recoup some losses by the end of the week. There were a number of factors, but the fact that Chinese data beat expectations despite the ongoing tussle over tariffs seemed to help In addition, a lull in the equity rout helped risk appetite in general. Overall, the Australian dollar held a gain of 1% for the week, a particularly strong performance given the nadir of USD0.7041 early in the week.
Conditions elsewhere also assisted the New Zealand dollar. The news from the US and China worked together to assist the kiwi after another tough week. Ecostats released today include the BNZ-Business NZ performance of manufacturing index which may provide further assistance, but it’s worth noting that manufacturers were the most pessimistic group in the New Zealand Institute of Economic Research’s latest quarterly survey of business opinion, published last week and therefore investors will not be putting much hope in the numbers.
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