Downing Street tries to clarify UK Brexit stance as GBP pulled between domestic politics and BoE meeting later this week.
Monday 5 February, 2018
Daily Currency UpdateGBP/USD actually finished unchanged last week having been as low as 1.3995 on Tuesday and as high as 1.4275 on Thursday. After Friday’s US employment report, GBP/USD fell a full cent to end the week roughly where it had begun at 1.4125 and it is only modestly below that level after a fairly quiet session this Monday morning in Asia.
The weekend Press in the UK was full of rumours of a leadership challenge and pressure on the PM to clarify her own intentions. Finally, on Sunday evening, Downing Street ‘sources’ gave an on the record but anonymous statement which said, “It is not our policy to be in the customs union. It is not our policy to be in a customs union.” The statement went further than Prime Minister May who, on Friday, refused to rule out involvement in a customs union when questioned during her visit to China. She had simply told journalists then, “What I want to do is ensure that we have got the best possible trade arrangements with China and with other countries around the world.”
For the week ahead, there’s a Bank of England MPC meeting on Thursday. In his appearance before a House of Lords Select Committee last Thursday, BoE Governor Carney hinted that the Bank is preparing to upgrade the forecasts in its Inflation Report. “I would expect that in 2019 we will see a pick-up in this economy all things being equal – strong global growth, greater certainty... A disorderly Brexit, not a likely scenario at all, is less likely than at the time we did the assessment in the fall.” Whether the Bank’s relative optimism will outweigh the political negatives, however, remains to be seen. With the UK service sector PMI due at 9.30am local time, the Pound opens this morning at USD1.4120, GBP/AUD1.7790 and GBP/NZD1.9325.
Key MoversWhat a dramatic week that was for the US Dollar. It opened on Monday with its index against a basket of major currencies at 88.75, hit a best level of 89.25, but by Thursday evening was down at just 88.27; only a tiny fraction above its Davos low. In the first four days of the week, neither President Trump’s State of the Union Address, strong incoming economic data, or a somewhat more hawkish FOMC Statement could offer any support to the currency.
Having spent all week completely ignoring very strong incoming economic data and being totally unmoved by higher US bond yields, it was not until Friday that the USD finally snapped higher after the employment report showed that average earnings growth had risen to 2.9%; the highest since 2009. Non-farm payrolls were only around the average of the previous 12 months at 200,000 and the average workweek actually fell. But, with the bond market acutely sensitive to signs of inflationary pressure, the earnings number sent 10-year Treasuries up to 2.84%; a huge rise in yields of 38bp since the beginning of the month.
The USD index against a basket of major currencies was already a couple of tenths higher on Friday morning in Europe, but after the employment report was published it jumped to a high of 89.00 before settling into the New York close around 88.90. As well as a new Governor of the Federal Reserve Bank, there are plenty of his colleagues scheduled to speak later this week. Even arch-dove Kashkari on Friday noted that he saw inflationary signs in the labour data and it will be interesting to see if the speakers have soothing words for stock market investors or focus, instead, on the continued normalization of US monetary policy. The USD index opens in London this morning at 88.85 with 10-year Treasury bond yields at 2.86%.
The euro had a week full of very positive economic news and, crucially, no attempt from anyone on the ECB Council to try to talk it lower – other than the usual language about excessive volatility which traders have learned to take in their stride. EUR/USD began the week around 1.2425 and having been as low as 1.2345 and as high as 1.2515, it finished on Friday at 1.2455 as it withstood the USD surge better than most of the other major global currencies we follow closely here.
Economic news in Continental Europe continues to be extremely positive. Real GDP in the Eurozone rose 0.6% q/q in Q4, slowing slightly from an upwardly-revised 0.7% in Q3, in line with the consensus. It was the 19th consecutive quarter of growth in GDP and put the euro region’s 2017 expansion at 2.5%. That’s better than had been anticipated by the European Central Bank, and it’s a pace the region hasn’t seen since before the financial crisis in 2008. Inflation continues to lag well below the ECB’s target of “close to, but just below 2%” but there was a big rise in France last month which offset some of the softness in Germany. Oil prices and a rapid pass-through into CPI through petrol prices are now perhaps key to near-term progress towards the inflation target.
This Monday morning in Europe brings the service sector purchasing manager surveys and traders will be looking to see if the strength in manufacturing has been replicated elsewhere in the economy. The EUR opens in Europe this morning at USD1.2455 and GBP/EUR1.1335.
The Aussie Dollar was the worst performer amongst the major currencies in what turned out to be a very volatile week across asset classes. AUD/USD was back below 80 cents on Friday morning and immediately before the latest US employment report was trading around 0.7990. News of a 2.9% y/y increase in US average earnings (the highest since 2009) pushed 10-year Treasuries to 2.84% and the USD surged as analysts began to pencil in a 4th rate hike in the US for 2018. By the end of the New York session, AUD/USD was down at 0.7930.
In economic data today, the service sector PMI registered 53.8 in January, down from 55.1 in December, to signal the slowest pace of expansion in Australian service sector output since last October. Both incoming new orders and employment increased to the weakest extents since data collection began 21 months ago. On the price front, output charges rose at the slowest rate since July 2017 amid a softer upturn in input costs. Despite the general weakness in the survey, confidence strengthened in January to a four-month high. Around two-thirds of monitored companies forecast output to rise over the next year, with positive sentiment attributed to planned expansion into foreign markets, organic business growth and new marketing initiatives.
We’ll see what the RBA has to say – if anything – about the value of the currency when it sits down to its first Board meeting of the new year next tomorrow and on Friday when it releases its latest Quarterly Statement of Monetary Policy. Before that, the Australian Dollar opens in Europe at USD0.7935, with AUD/NZD at 1.0860 and GBP/AUD1.7795.
The Canadian Dollar began last week around USD/CAD1.2325 and the pair initially moved higher to 1.2375 on Tuesday on concerns about NAFTA and what might be said in the State of the Union speech. President Trump’s speech didn’t once mention Canada directly, however, and there were plenty of sighs of relief north of the border that NAFTA talks didn’t completely collapse. Trade ministers from Canada, Mexico and the United States ended the sixth round of NAFTA negotiations in Montreal, agreeing some progress was made but acknowledging that tough challenges still lie ahead to strike a new deal.
On Thursday evening, after a good set of monthly GDP numbers and a particularly strong manufacturing PMI report, USD/CAD was down at 1.2260; its lowest level since September 19th. Immediately prior to the US employment report on Friday, the pair was at 1.2310. Yet, by the end of a pretty wild week across asset classes around the globe, USD/CAD was at 1.2435; its highest level in ten days.
Prime Minister Justin Trudeau warned the United States on Friday that Canada "will not be pushed around" on trade negotiations and Reuters reports that Trudeau again warned US negotiators that Canada could walk away from the agreement if its terms are not met. “The negotiations are complex and challenging ... I’ve said many times, we are not going to take any old deal. Canada is willing to walk away from NAFTA if the United States proposes a bad deal.” The Canadian Dollar opens this morning in Europe at USD/CAD1.2420 and GBP/CAD1.7530.
The New Zealand Dollar began last week very much on the back foot after the disappointments of the December quarter CPI report. NZD/USD opened around 0.7350 and as a sell-off gathered pace - eventually taking it down to 0.7283 - so the AUD/NZD cross hit 110.70; its highest level since December 5th. From that point on, though, it was good news all the way for the NZD, kicking off with the monthly trade numbers, then a Standard and Poor’s ratings affirmation and finally a very positive opinion poll for Prime Minister Jacinda Ardern, which helped push NZD/USD to its best level of the week at 0.7415.
Friday was a dramatic day for the US Dollar, as well as for stock and bond markets around the world. Immediately prior to the US labour market report, NZD/USD stood at 0.7360; pretty much in the middle of the week’s trading range. Just a few hours later it was testing 0.7300 as the USD rebounded sharply. It would be wrong to conclude that this was a poor performance by the Kiwi Dollar; if we look at the very important AUD/NZD cross, it moved down from a 7-week high last Monday of 1.1070 all the way to 1.0850; its lowest since the September Election.
The first RBNZ policy meeting of the year is on Thursday this week. Analysts are confident and unanimous that there will be no change in interest rates. Nor are they generally expecting much change to the Central Bank’s forecast track for interest rates, though the markets’ view on the timing of the first hike in early 2019 is a bit later than the RBNZ has so far penciled-in. The quarterly employment report is on Wednesday after the Waitangi Day national holiday on February 6th. The New Zealand Dollar opens this morning in Europe at USD0.7305 and GBP/NZD1.9325.
- GBP/USD: 1.3995 - 1.4220 ▼
- GBP/EUR: 1.1245 - 1.1390 ▼
- GBP/AUD: 1.7655 - 1.7850 ▼
- GBP/CAD: 1.7475 - 1.7555 ▼
- GBP/NZD: 1.9255 - 1.9405 ▼