Euro Weekly 9 March 2018

At the end of last week, PM Theresa May gave a speech which acknowledged that trade with the EU will become more difficult, the ECJ will continue to have a say on certain matters and some freedom of movement will persist. This more realistic tone appeared to reassure investors and sterling was on average unchanged on the day. Early in the week, sterling received some help from the UK services sector purchasing managers’ index, which was a point and a half higher on the month at 54.5. Although the numbers from Euroland and the States were all better than that, most of them came in below forecast while the UK figure beat it by a point. So the pound strengthened by an average of 0.3%, losing out only to the rand.

The euro was helped by news that Germany’s Angela Merkel has, after five months, secured a coalition deal. It was temporarily hurt by the lack of a clear-cut Italian election result but the initial reaction passed swiftly because investors are largely acclimatised to unstable politics in Italy. The euroland PMI numbers were lower on the month but still within a healthy range, coming in at 56.2. The European Central Bank dropped some key wording regarding the future of monetary policy Inflation forecasts for 2019 were revised lower, but 2018 GDP growth was revised up to 2.4%, from the previous forecast for 2.3% and 2019 growth is forecast at 1.9%. The change in tone meant the ECB appears willing to extend its quantitative easing programme if needed. The current EUR30bn per month asset purchase program extends to September 2018, or until ‘a sustained adjustment in the path of inflation consistent with its inflation aim’ is seen. ECB President Mario Draghi made it clear that the ECB would continue to be reactive to the situation.

In the US, Donald Trump’s imposition of import taxes on steel and aluminium was met by threats of retaliation by the EU and Canada. Off the cuff, Brussels spoke of tariffs on motorbikes from Milwaukee and fried chickens from Kentucky.

America’s ISM reading was 59.5, which is well within the growth zone. The US dollar has been through some ups and downs this week, however. Early suspicion that the trade war could be called off was positive for the US dollar, as was Fed governor Lael Brainard’s bullish speech about monetary policy. Speculation that North Korea might ditch its nuclear weapons knocked the dollar back, as did Mr Trump’s escalation of trade tensions and Gary Cohn’s resignation.

Investors seized upon comments from the White House suggesting that Canada and Mexico might not be hit by protectionist tariffs later in the week. Rightly or wrongly they inferred that the president could be about to cave in to free-market advocates in his own party. The Greenback was just about unchanged on the day. Investors appear to believe that the president is playing to his fan-base and that the tariffs will not easily find their way into the tax code. A $56.6bn monthly US trade deficit, the biggest in nine years, was not enough to shake that belief.

The Canadian dollar was hindered by noises from Washington early in the week about rewriting the NAFTA treaty in the United States’ favour. The Bank of Canada left its benchmark interest rate unchanged at 1.25%, surprising nobody. The Loonie weakened on the BoC’s less-than-ebullient statement but within a few hours it had made a complete recovery.

The Reserve Bank of Australia left its benchmark Cash Rate unchanged at 1.5%, as expected. Gross domestic product data showed Australia’s economy expanding by 0.4% in the fourth quarter, a little less than expected. Reports also showed a wider-than-expected trade surplus.

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