Weekly Update 24th May 2019

GBP: Resignation of PM Theresa May
After its second week of humiliation by the market, sterling enjoyed a slight boost early Friday morning following the much-anticipated resignation of PM Theresa May. With her departure set for 7th June, a new leader will guide the UK through Brexit, a prospect that excited investors after the past fortnight of misery for the pound. However, uncertainty over the nature of the departure continues to linger.

Bank of England deputy governor Ben Broadbent summed up the situation in a speech about the dampening effect of Brexit. Although he was speaking in the context of capital investment his argument applies equally to sterling: “A repeated series of cliff-edges, each of which is expected to be decisive but in reality just gives way to the next cliff, is more damaging for investment than if it had been clear at the outset that the process will take time.”

EUR: Held back by Germany
The euro was on average unchanged against the other ten most actively-traded currencies and strengthened by a cent and a quarter against sterling. Its average performance was matched by average economic data: some were good, some not so much. Euro zone inflation at 1.7% was unchanged on the month while core inflation ticked up to 1.3%. Construction output went down by less than expected in March. Consumer confidence improved to -6.5, well above its long-term average. Germany put a dampener on the proceedings: below-par domestic purchasing managers’ index readings dragged down the pan-Euroland measures so they, too, failed to match forecast.

Politically, Austria became the latest country to face the challenge of reconciling centrist governments with far-right populists. Nationalist vice-chancellor Heinz-Christian Strache was forced to resign after he was shown in a video offering political favours in return for election contributions. Chancellor Sebastian Kurz was in turn forced to call a general election.

USD: Dovish Fed, angry shoemakers
Investors had persuaded themselves that the minutes of the Federal Open Market Committee meeting three weeks ago would hint at the possibility of a rate cut later this year. They did not. The minutes simply reiterated that “the Committee will be patient”. It does not mean there will be no rate cut but the thought of one is not uppermost in the FOMC’s mind. Another body making news was the Footwear Distributors & Retailers of America. In an open letter to the US president, signed by 173 companies, the FDRA warned of the “catastrophic” impact of an extra 25% tariff which will mean a total tax of almost 100% on some items.

Economic data from the States played only a small role. The Michigan University index of consumer sentiment improved by five points to 102.4 while the Chicago Fed national activity index faded to -0.45, indicating below-trend growth. The provisional PMIs at 50.6 and 50.9 showed growth in manufacturing and services but they were not far above the breakeven level at 50. The dollar added a cent and a third against sterling.

CAD: Ignoring oil
Unusually, there was almost no correlation between the price of oil and the performance of the Loonie against the US dollar. WTI crude fell 7% over the week while the Canadian dollar remained unchanged against the Greenback. Its salvation lay in a softening of the US administration’s protectionist stance: Trump evidently finds it tough to fight a trade war on several fronts and would prefer to focus on China. Last Friday he lifted the protectionist tariffs on Mexican and Canadian steel and aluminium, opening the way to ratification of the United States-Mexico-Canada Agreement, or USMCA.

The few Canadian ecostats came in batter than expected. Retail sales went up by 1.1% in March, 1.7% excluding cars. Whole sale sales increased by 1.4% for the same month. The numbers were only briefly helpful to the Loonie but at least they did no damage.

AUD: RBA governor hints at rate cut
The antipodean central bank governors are readier than most to bare their souls on currency strength and monetary policy but Philip Lowe went a step further on Tuesday. The Reserve Bank of Australia chief ended a speech with the observation that “A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target. Given this assessment, at our meeting in two weeks’ time, we will consider the case for lower interest rates.” Although his sentiment was hardly a surprise, his clarity was: there will almost certainly be a rate cut at the beginning of June.

Mr Lowe’s words almost wholly reversed the upward boost that the Aussie had received from the unexpected re-election of prime minister Scott Morrison’s Liberal-National coalition last weekend. The currency is two cents firmer against sterling and all but unchanged against the euro and US dollar.

NZD: Shadowing the Aussie
The Kiwi’s close relationship with the Australian dollar was demonstrated twice during the week. It moved higher against the other major currencies as a result of the Lib-Nat win in the Australian general election and fell when RBA governor Philip Lowe dropped his heavy rate-cut hint. The first move was simply the effect of the Aussie’s gravity on its smaller neighbour. The latter was because a rate cut in Australia could encourage a second one by the Reserve Bank of New Zealand. The Kiwi is a cent and a third higher on the week against the pound.

Economic data from New Zealand were reasonable enough. Credit card sales were up by an annual 4.5% in April, as they had been the previous month. April’s trade deficit was almost exactly as forecast. Retail sales increased by 0.7% in the first quarter, with and without the effect of motor cars.

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