Weekly Update 10th May 2019

GBP: The spectre of Brexit
As Britain went into the bank holiday weekend the pound was looking perky. When Sydney opened on Monday morning it touched a two-month high against the euro. And that was the end of that. Sterling spent the following four days in retreat and on one of them – Tuesday – it was the biggest loser among the major currencies. The pound is an average of 0.2% lower on the week.

A mixed bunch of economic data showed retail sales and house prices rising more quickly than expected in April while the services sector purchasing managers’ index, at 50.4, was only slightly positive. It was not the ecostats that made sterling’s life difficult, it was the continued lack of progress with Brexit and the absence of any hint of light at the end of the long and torturous tunnel.

On Thursday 9 May, Europe Day, 27 EU leaders met in Sibiu, Romania, for an informal meeting. Theresa May was not invited because the meeting had been organised months ago in anticipation that Britain would no longer be in the EU by then. The European Council fixed 28 May for its next meeting, soon after the European elections. The meeting in Sibiu was the highlight of Europe’s political week.

The highlights of the euro’s statistical week were Monday’s purchasing managers’ index readings for the services sector. Except for Italy, whose 50.4 was below forecast and the weakest of the bunch, all the numbers came better than expected. German factory orders increased by 0.6% in March, less than forecast, while industrial production surprised on the upside with a 0.5% rise. The euro had a moderately successful week, strengthening by an average of 0.3%. It added four fifths of a cent against sterling and half a US cent.

USD: Trade war escalation
Friday’s US employment data were good in many ways. Unemployment touched a 49-year low of 3.6% and nonfarm payrolls went up by 508k over the previous three months, 94k more than expected. However, average annual earnings growth was slower than expected at 3.2%. Investors decided that wages were more important than jobs and the dollar was knocked back. The two US services sector PMIs, while better than most of Europe, were also disappointingly below forecast.

Beyond the data, the main US focus for investors was the president’s threat to increase tariffs to 25% on $200 billion of Chinese goods. At a rally on Wednesday Trump told supporters that he had upped the ante because China “broke the deal… so they’ll be paying”. Any thoughts that he might be bluffing were dismissed on Thursday night when the tariffs came into force. Although in theory the trade was escalation should be positive for the dollar it has not yet worked out like that: it is an average of 0.2% lower on the week.

CAD: Tracking the Greenback
The Loonie is unchanged on the week against the US dollar. It did not slavishly follow its southern neighbour, covering a three-quarter-cent range four times before returning to its starting point. Against sterling the Canadian dollar is a third of a cent firmer.

There was none of the usual help – or hindrance – from oil prices. WTI crude was almost precisely unchanged on the week at $61.67. Canadian economic data were mostly positive for the currency. The Ivey purchasing managers’ index unexpectedly jumped a point and a half to a seasonally-adjusted 55.9 and housing starts rebounded by a monthly 22.6%. The only bugbear was the balance of trade: although the deficit was smaller than expected in March, at $3.21 billion, it was wider than investors had been told to expect. The only outing for Bank of Canada governor Stephen Poloz was a speech about mortgage lending. He did not touch on monetary policy.

AUD: The bank says not yet
The big event of the Aussie’s week was the Reserve Bank of Australia’s monetary policy statement on Tuesday morning. Investors had been led to believe that the RBA would keep its Cash Rate unchanged at 1.5% and that is what it did. However, despite the impending general election next weekend, some had evidently suspected that the RBA might deliver the rate cut that is surely on the cards. There was therefore a relief rally for the Aussie when the statement came out. Although there was no carry-through the Aussie banked enough support to keep it steady on the week against the US dollar. It strengthened by a fifth of a cent against sterling.

Apart from March’s 0.3% monthly increase in retail sales the Australian ecostats were uninspiring. Job adverts were 0.1% fewer in April. The construction sector PMI fell even further into the sub-50 contraction zone at 42.6. The trade surplus narrowed to $4.95 billion as imports and exports both fell by 2.0%.

NZD: The first cut
The Kiwi’s week centred on Wednesday’s monetary policy statement from the Reserve Bank of New Zealand. Analysts believed the RBNZ would be the first developed-world central bank to deliver a cut to its benchmark interest rate, from 1.75% to 1.5%. And that is what the bank did. The market’s Pavlovian reaction was to mark down the NZ dollar by more than a cent and a half. Minutes later they began to mark it back up again, realising that the move had been fully priced into the Kiwi ahead of the event.

The NZ dollar is nevertheless an average of 0.7% lower on the week, down by half a cent against sterling. Its problem is sentiment rather than statistics. GDT’s fortnightly milk price index was up by 0.4% and electronic card retail sales in April were 4.5% more than in the same month last year.

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