Weekly Update 14th June 2019

GBP: Holding out for a hero
The bane of Brexit returned to haunt sterling, as Conservative MPs set about selecting a new leader to have another go at extricating Britain from the EU. As expected, the early front-runner is erstwhile foreign secretary Boris Johnson. His strategy is to ensure a gaffe-free campaign by avoiding public appearances, which might work with the Tory faithful but leaves investors in the dark about what he would actually do as prime minister.

On balance the UK economic data were sort of alright. The Halifax index put house prices 5.2% higher on the year after a 0.5% rise in May. April’s £4.6 billion trade deficit was smaller than expected. Unemployment was steady at 3.8% and basic earnings growth accelerated to 3.1%. Against those, manufacturing output plunged 3.9% in April after a rush of pre-Brexit stockpiling and gross domestic product shrank 0.4% in the month. Sterling is on average unchanged on the month against the other majors.

EUR: The trouble with Italy
Italy’s budget deficit remains a bone of contention. The European Commission is said to be moving closer to taking punitive action against the Italian government because of its egregious disregard for EU fiscal rules. Rome has come up with a cunning wheeze to get round the problem with the issue of ‘mini BOTs” by the Italian treasury; undated small-denomination IOUs. But there are obstacles even before they start. If mini BOTs are just tiny government bonds they will further inflate the country’s debt and are therefore not allowed by the EU. And if they are not bonds they are, in effect, a parallel currency and are therefore also not allowed by the EU.

Economic data from the euro zone mostly went through on the nod. German industrial output was typically miserable, falling 1.9% in April, and the trade surplus narrowed as exports fell at three times the pace of imports. The euro lost a quarter of a US cent and added the same amount against sterling.

USD: Weak data, strong dollar
The US dollar was at the head of the major currency field, strengthening by half a cent against sterling and a quarter of a cent against the euro. Its success came despite a crop of US economic statistics that failed to produce one genuinely positive number. Last Friday’s employment report showed (8) a monthly increase of 75k in nonfarm payrolls, a far cry from the forecast 185k rise. Overall there were 186k fewer people in work than forecast – a month’s worth in the recent scheme of things. The other big miss was inflation, where the headline rate slowed to 1.8% and the core rate to 2.0%. The numbers did not make a compelling case for Fed rate cuts but neither did they present an obstacle to policy easing.

In an environment beset by concerns about trade, global growth and the US administration’s capricious foreign policy investors were looking for security. They found it in US treasury bills and bonds.

CAD: In thrall to oil
The Loonie’s progress against the US dollar was to a large extent a function of the ebb and flow of oil prices. They, in turn, were driven by the wax and wane of economic confidence and the US presidential thumbs as Trump twittered his way through the week, cajoling and threatening in equal measure. WTI crude is a net 2% lower on the week, having risen to $54, fallen to $51 and rallied again to $53 after attacks on oil tankers in the Straits of Hormuz. The CAD is 0.2% lower against the US dollar and 0.2% firmer against sterling.

Last Friday’s Canadian employment data were positive for the currency. The 27.7k increase in payrolls was three times as big as forecast and the rate of unemployment unexpectedly fell from 5.7% to 5.4%, its lowest level “since comparable data became available in 1976”. Housing starts and building permits also beat forecast in May.

AUD: Jobs disappoint
On Thursday morning the Australian employment data gave investors another reason to steer away from the Aussie. They were not irredeemably bad: at 66.0% the participation rate was higher than forecast, as was the 42.3k rise in employment. But the vast majority of that payrolls increase – 39.8k – related to part-time jobs, with only 2,400 people finding full-time work. The 5.2% rate of unemployment was also a disappointment; analysts had predicted that it would fall to 5.1%. NAB’s monthly business survey told a mixed story: “Confidence saw a post-election spike in May but conditions decline further with the private sector continuing to lose momentum”.

Two underlying stories made life difficult for the AUD. The ecostats and the narrative from the Reserve Bank of Australia make another one or two rate cuts all but inevitable this year and the trade uncertainty generated by the US White House threatens Australia’s sales to China, its biggest overseas market. The Aussie has lost almost one US cent on the week and it is down by a cent and two thirds against sterling.

NZD: Heading for downturn
After booking a windfall gain last Friday, as the result of much weaker-than-expected American employment data, the NZ dollar spent this week losing steadily more ground to the US dollar. It is down by 1.5% there and has given up more than two cents to sterling. A major factor in its decline was the uncertainty created by America’s trade wars with all and sundry. That concern affected both the NZ and Australian dollars.

The Loonie’s other problem is a perception that New Zealand’s economy is running out of steam and possibly heading for recession. Two statistics fed that suspicion. Electronic card retail sales (14) fell 0.5% in May, having been forecast to increase by 0.7%. The Business NZ purchasing managers’ index (15) was considerably weaker than expected, with employment and production contracting and new orders growing at their slowest rate since 2017.

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