Weekly Update 2nd August 2019

Brexit wipeout

GBP: Skittled by no-deal rhetoric
Only days into the Johnson administration, the tough talking on Brexit got brutal. Minister Michael Gove confirmed at the weekend that he is “working on the assumption” of no deal and will head a special committee to plan for that outcome. Investors were forced to take seriously the idea that the Prime Minister intends to crash Britain out of the EU in three months’ time, whatever the consequences. Sterling took an absolute pasting on Monday, losing an average of 2.1% to the other major currencies and hitting a 28-month low against the US dollar.

It staged a modest recovery in the following couple of days, eventually making an average net loss of 1.9%. The few economic data had little bearing on its performance and the Bank of England’s quarterly Inflation Report, while appropriately cautious, told investors nothing they had not already guessed.

EUR: Lacking in confidence
The euro did not have to work hard to beat the retreating British pound. This was just as well, for the euro zone economic data were almost without exception disappointing or just plain bad. The euro took two and a half cents off sterling and lost two thirds of a US cent.

Half a dozen confidence measures on Tuesday from GfK and the European Commission showed it falling among German and Euroland consumers and across the business spectrum. German inflation slowed from 1.5% to 1.1% and in pan-Euroland it was down from 1.3% to 1.1%. Gross domestic product for the euro zone expanded by a provisional 0.2% in the second quarter, in line with forecasts but only half the growth achieved in Q1. Provisional purchasing managers’ index readings for the Euroland manufacturing sector on Thursday looked dismal. Only Greece and the Netherlands saw growth, scoring above 50 on a 0-100 scale: Germany came last at 43.2, a seven-year low.

USD: Rates and tariffs
There was something almost every day to affect the dollar. At the end of last week, it was about intervention. Larry Kudlow, the President’s economic advisor, said the administration has “ruled out” intervening to weaken the USD. His boss disagreed, telling reporters “I didn’t say I’m not going to do something”. On Wednesday, after the Federal Reserve had delivered the expected quarter-percentage-point rate cut, Chairman Jay Powell confused the market about whether it was a one-off move or the beginning of an easing programme. On Thursday, the US president announced new 10% tariffs on Chinese goods, raising fears for the domestic and global economy and sending equities and oil prices into freefall.

The US economic data tended more towards the alright than the excellent. GDP growth slowed by less than expected in the second quarter. ADP reported 156k new jobs in July, supporting predictions that this Friday’s employment report would show nonfarm payrolls increasing by 164k. The dollar strengthened by 0.6% against the euro and by 27% against the struggling pound.

CAD: Undermined by US events
Even by its own standards it was a barren week for Canadian economic statistics. On Wednesday, sharp falls for industrial product and raw materials prices were balanced by a 0.2% monthly expansion of GDP. The following day’s manufacturing sector purchasing manager’ index came in above forecast at 50.2, a four-month high. It did not show strong growth but, above the 50 breakeven level, it was at least positive.

Rather than the domestic data it was exogenous – specifically US – factors that had most to do with the Canadian dollar’s movements. The Federal Reserve’s less than enthusiastic rate cut that was positive for the US dollar reflected badly on the Loonie. When Trump’s new Chinese tariffs sent oil prices 7% lower the Loonie suffered again. It lost a third of a US cent on the week and rose nearly three cents – 2.3% – against sterling.

AUD: Stabilising house market
It is still looking somewhat gloomy in the Australian residential property sector. The decline in prices might be coming to an end but “we’re not really seeing signs of a recovery just yet”. New home sales fell 12.4% in June. Building permits were down by 1.2% on the month and by 25.6% from June last year. The Australian consumer price index data for the second quarter were much as expected. Headline inflation accelerated by a little more than forecast from 1.3% to 1.5% with the Reserve Bank of Australia’s trimmed mean steady at 1.6%. Both of the manufacturing purchasing managers’ indices were in the growth zone above 50; AiG’s up by two points at 51.3 and CBA’s half a point lower at 51.6.

Neither the Federal Reserve’s tentative rate cut nor the US president’s escalation of the trade war was helpful to the Aussie. It was in the back half of the field, falling 2.0% against the US dollar and strengthening by 0.8% against sterling.

NZD: Further rate cuts to come
Statistics New Zealand had only one set of data to offer that was remotely relevant to the NZ dollar. Building permits fell 3.9% in June. The ANZ Business Outlook was of far greater interest to investors. The report’s headline “Grim” provided a succinct summary. “Headline business confidence fell 6 points to net -44% in July’s ANZ Business Outlook. Firms’ views of their own activity fell 3 points to +5%, the lowest read since August last year. Other activity indicators were also weaker”. “Residential construction intentions fell back into negative territory. Employment intentions and profitability expectations for the construction sector plummeted to the lowest since 2009.”

The Kiwi’s picture was further clouded by a prediction from BNZ that there will be two more rate cuts by the Reserve Bank of New Zealand this year. The Loonie did only slightly better than the Australia dollar, falling 1.7% against the US dollar and strengthening by 1.0% against the pound.

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