GBP: Last week, Mark Carney met with concerns over post-Brexit monetary policy; the Bank of England stated that it is not a given that a no-deal Brexit would lead to lower interest rates. The market does assume that an orderly Brexit would mean a faster pace of rate increases, and positive sentiment on Brexit appeared to be the tone for this week. The sterling-positive rate story was balanced by the negative news that Downing Street had not, after all, secured an arrangement for UK banks to operate in Europe and a Brexit deal will not be finalised within three weeks. However, the mood had been set and the market seized on a story in The Times that a Brexit deal is imminent. Also, again, the prime minister’s office played down the idea, calling it “speculation” but investors have begun to believe that there must be something to these stories and that Theresa May is preparing to force a compromise upon her recalcitrant Brexiteers.
There was little in the ecostats to support this; Britain’s construction sector also came in higher than expected but the services sector purchasing managers’ index fell from 53.9 to 52.2, missing forecast by more than a full point and touching its lowest level since immediately after the Brexit referendum. Yet sterling hesitated only briefly before zig-zagging to a four-week high against the euro. All eyes were on Brexit as the PM held a cabinet meeting sharing the details of the proposed Brexit deal which came with the caveat that the deal was 95% complete and the Irish border remains a sticking point that no amount of optimism can surmount.
EUR: The euro has had less of a positive week and declined against a basket of currencies towards the end of the week. The European Commission is warning of weakening global economic activity, growing trade tensions, slower employment growth and increased uncertainty over investment could slowdown economic growth in the euro area in the coming two years. In addition, this issue of Italy’s budget and the EU fiscal rules is coming to a head. There is some hope that the difficulties might lead to a more durable approach to EU fiscal policy but in the meantime, the matter continues to harry the euro.
USD: It was a big week for the US dollar. At the end of last week, the US dollar was the top performer due to positive employment data. Not only were a quarter of a million jobs added in October, wages growth accelerated from 2.8% to 3.1% a year. This is the biggest annual gain in more than nine years. The major factor this week was the US midterms. The dollar fell after the Democrats took the majority in the House of Representatives; this is due to the fact that the opposition now has the opportunity to frustrate the president’s policies and it gives more teeth to the investigation into collusion and the potential for impeachment if any wrong-doing is uncovered. The result had been largely priced in, but it’s clear that a change is coming in US politics and the market reacted to the uncertainty. There were no meaningful US economic data to shade the debate and the president said nothing to make investors worry. He did sack his attorney general and he withdrew the White House pass of a journalist who asked difficult questions but investors saw that as just another day at the office. Towards the end of the week, the Federal Reserve opted not to change interest rates Thursday but hinted that rates are likely to rise on 19th December and that there would be three more increases next year.
CAD: Oil prices rose amid reports that Russia and Saudi Arabia had begun discussions over possible curbs to oil production in 2019 and this assisted the Canadian dollar briefly. However, this didn’t last long and the loonie weakened to an eight-week low against its broadly stronger US counterpart on after oil prices recovered and the Federal Reserve left intact its plans to gradually raise interest rates.
AUD: Strong economic numbers from China proved positive for the Australian dollar. In recent months, the aussie has been volatile and struggling due to the potential impact of the US-China trade war. The Australian dollar may not be out of the woods; there are no signs of an end in sight for the trade war and if no resolution can be found, there could be longer term implications to the dispute which ripple across world trade.
NZD: The NZ dollar jumped two cents higher overnight on the back of strong jobs data. Employment in New Zealand was up by 1.1% in the third quarter and the rate of unemployment fell from 4.5% to 3.9%. The numbers were well ahead of what had been fairly pessimistic forecasts. This morning’s monetary policy statement from the Reserve Bank of New Zealand held no surprises and did not affect the Kiwi. The bank “expect[s] to keep the OCR at [1.75%] through 2019 and into 2020”.
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