Weekly Update 29th March 2019
GBP: Fairly meaningful vote
Today parliament will be asked for the third time to consider the prime minister’s EU withdrawal bill. Because of the House of Commons speaker’s proscription against bringing “substantially the same” legislation before the house again and again, today’s vote will not cover the political declaration. The pound’s position going into the weekend will depend on how that vote goes.
In a week almost bereft of UK economic data the story for sterling depended entirely on the Brexit narrative. It went fairly well until the house ran a series of indicative votes on Wednesday. MPs could not find a majority for any of the eight proposals, confirming again that parliament is more certain about what it doesn’t want than what it does. On average sterling is 0.4% firmer on the week against the other ten most actively-traded currencies. It has fallen by an average of 0.8% since the end of February.
EUR: Held back by a slowing economy
Last Friday’s provisional purchasing managers’ index readings from the euro zone came as a bit of a shock to investors. The French numbers for manufacturing and services were both below 50, indicating a slowdown and the German manufacturing PMI dropped another three points to 44.7, falling more deeply into the contraction zone. Manufacturing in Euroland as a whole also declined, delivering a 47.6 reading. Except for German business confidence, which improved in March, just about all the data were disappointing.
The European Central Bank president acknowledged this on Wednesday. He said in a speech that the bank is ready to rethink its interest rate guidance, possibly extending the period of rock-bottom rate beyond the end of the year. The euro felt the pain, falling by an average of 0.3%. It lost one and a half US cents and declined by four fifths of a cent against sterling.
USD: Good enough for second place
The dollar was narrowly behind the Japanese yen, strengthening by an average of 0.9% against the other ten most actively-traded currencies. It added three quarters of cent against sterling. The US economic data were not exactly wonderful: more of them came in below forecast than beat it. But in absolute terms the American numbers looked better than those from Europe and elsewhere. Even though fourth quarter GDP growth was downgraded to an annualised 2.2%, the 0.6% quarterly growth to which that equates was ahead of its peers.
The most interesting US statistic was January’s balance of trade. The deficit shrank by 15% to $51.1 billion, thanks to a quadrupling of China’s soybean purchases and a fall in US imports from China after panic buying to beat tariffs at the end of last year. Investors do not usually pay much attention to US trade figures but they noticed this set.
CAD: Tripped by the data, going nowhere
Last Friday and again on Wednesday the Loonie was knocked back by economic data which investors found wanting. It lost a third of a US cent on the week and is unchanged against sterling. Oil prices played a minimal part in its performance as they, too, went nowhere.
Friday’s figures showed retail sales falling 0.3% in January. They were supposed to have increased by 0.4%. The result was exacerbated by a downward revision to the change in December, from -0.1% to -0.3%. The balance of trade numbers on Wednesday were also a disappointment. Analysts had predicted that Canada’s trade deficit would shrink to $3.5 billion in January after a record $4.8 billion gap in December. They were wrong, it narrowed to $4.35 billion, the second biggest shortfall ever. Statistics Canada put a positive spin on it, noting the “first increase in exports since July 2018” but investors were not convinced.
AUD: In third place by accident
The Aussie took third place behind the Japanese yen and US dollar. It lost narrowly to the USD and strengthened by two thirds of a cent against the pound.
Australian economic data were conspicuous by their absence. The only ones to appear were for private sector credit in February. Lending to individuals and companies increased by a monthly 0.3% and was 4.2% higher on the year. Investors did not really notice.
What they did notice, though, was guidance from the Reserve Bank of New Zealand that its next change to interest rates was likely to be a cut. Although there is no direct link between the RBNZ and the Reserve Bank of Australia, investors decided that such a move would be likely to affect the thinking of the RBA. It does not have much room to take rates lower but it might be inclined to try to find some.
NZD: Rate cut prospect downs the Kiwi
The NZ dollar was doing reasonably well until Wednesday morning. Trade figures the previous day had surprised on the upside with a $12 million surplus in February. Analysts had forecast a $109 million deficit. Data on Wednesday and Thursday night, which showed a slight deterioration in business confidence and a sharp slowdown in the pace of building permit issuance, had little impact on the currency.
It was the Reserve Bank of New Zealand’s monetary policy statement early on Wednesday that had the greatest effect on the Kiwi. The RBNZ did not beat about the bush. The second sentence in the statement concluded: “…the more likely direction of our next OCR is down”. There was nothing there to leave investors in any doubt. Analysts expect a rate cut as soon as May, and perhaps another in June. The effect of the RBNZ statement was to knock the stuffing out of the NZ dollar. It has lost almost one US cent and is down by a cent and a half against sterling.
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