Weekly Brief

Always bet on the lettuce

12 minute read

21 October 2022

GBP

Whilst this week has been far more comfortable for sterling and gilt traders, the same cannot be said for Liz Truss and her government. After much intense speculation, Truss resigned as PM yesterday (Thursday) afternoon, marking the end of the shortest serving term as British PM in history, at just 45 days. Truss said that she could not ‘deliver the mandate she was elected, and had notified the King that she was resigning as Tory party leader.’ Truss also said in her speech that she expects a new leader to be announced within the next week.

Leading into the announcement, Wednesday had been particularly tough day for the government, with home secretary Suella Braverman quitting, after sending a confidential email from her private email, coupled with reports of Tory MP’s being ‘manhandled’ during a vote on fracking. Of course, all of this comes after Truss was forced into publicly apologising (several times) for the mini-budget tax cuts and energy price cap fiasco, which fledgling chancellor Jeremy Hunt was forced to unwind in order to stabilise markets, in a bid to avoid possible further sterling and gilt market meltdowns.

Speculation had mounted that Truss would be resigning, after an unexpected meeting with the head of the 1922 committee, Sir Graham Brady, earlier in the day. The 1922 committee decide on the leader of the Tory party. Amongst the front-runners for the job are former PM Boris Johnson and his chancellor, Rishi Sunak. Aside from the ongoing political drama, the latest UK inflation data for September saw headline inflation jumping back over 10% (YoY), which has added to the belief that the BoE will go for a larger rate hike at their next meeting. In further worrying signs for the economy, the latest UK Retail Sales (released Friday) declined by 1.4% through September, against an expected drop of 0.5%.

As for sterling and UK gilts, well after a turbulent few weeks, a sense of normality has ensued, with daily ranges for the pound reverting to far more digestible levels. GBP/USD has therefore traded within a 1.1150 – 1.1440 range, and GBP/EUR has also gyrated between 1.1400 – 1.1600 throughout the week. The daily changes in key UK gilt yields have also reverted to a far more ‘normalised’ range. Of course, the fluid political backdrop still has the potential to impact the short-term profile for the pound, but in the long-run markets will likely pay far greater attention to the fiscal outlook, ongoing BoE moves and what is happening at No11, than the comings and goings next door, at No 10.

Thoughts from the dealing desk

“With PM Truss’ departure yesterday afternoon, fresh waves of political uncertainty have sprung into the markets. Historically, nervous markets haven’t benefitted the volatile pound yet sterling showed remarkable resilience against the euro having seen the rates touch over 1.15 against the euro and saw GBP/USD trade past 1.13 before easing off. Having seen the pound drop in the lead up to the Tory leadership contest at the start of September, traders and clients alike were expecting to see the risk-off currency weaken and an influx of trading in the early afternoon session. However, markets appear to prefer the ambiguity of another election with names of Johnson and Sunak being thrown into the mix for the next frontrunner. Expect choppy trading conditions at the start of next week as investors bet on which way the contest will go.”

“Sterling remains subdued with economic growth concerns. The Bank of England still predicts the UK to head into recession later this year and continues to convey a negative outlook. For some of our European property sellers looking to repatriate back to the UK, keen eyes anticipate rates returning back to the near-parity levels we saw around the mini-budget. These were the same levels witnessed at the height of the pandemic in 2020 making them a 2.5 year high at the time. A leadership contest aside, it would take a significant event to return to these positions and many clients have been trading repeatedly on present levels considering that at the start of the war in Ukraine in February, GBP/EUR rose to 1.21 and therefore a 200k euro property sale is still worth an extra £9000 at today’s levels.”

-Sam Mills, Dealing Manager

EUR

The latest Euro area inflation report highlighted that over half of the countries in the block now have inflation that exceeds 10% (YoY). The latest HICP inflation saw headline inflation near 10% for the region as a whole, jumping from 9.1% in August. Energy prices continue to dominate the increase, magnified by Russia’s decision to limit gas supplies to the region.

The European Commission have proposed a EUR40bn package, aimed at helping small and medium-sized businesses and look to ‘address energy poverty through support to vulnerable households.’ At the time of writing, EU leaders were meeting to discuss the package. Germany have unveiled their own EUR200bn plan to combat the energy crisis and soaring costs, with relief measures including a price cap on gas, and a tax on windfall profits for energy companies.

Elsewhere, the latest ZEW Survey highlighted how the Current Situation has deteriorated to -72.2, but with a pleasant upside boost to Economic Sentiment, which rose from -61.9 to -59.2.

Given surging inflation in the region, it seems highly likely that the ECB will go with a bold rate hike again at next week’s meeting. Another 75bps hike looks the order of the day, according to analyst estimates, with 75% of economists polled by Reuters going for a repeat of the last ECB meeting. Interestingly enough, only two economists polled favoured a 100bps hike, with the remainder opting for a 50bps move.  

As for the single currency, well the broad 0.9600 – 1.0000 range in EUR/USD looks well-established for now. If anything, the Euro has trended slightly higher through this week, but next week’s ECB meeting is far more likely to generate some serious intra-day volatility.

USD

For the first time since we can remember in recent history, the dollar has had a pretty sideways week (so far), with the dollar index (DXY) not moving below 111.50 and not above 113.00 all week (to Thursday), highlighting the rangebound nature for the greenback. Granted, there are always exceptions, and the battle in USD/JPY is ongoing, with markets teasing the BoJ into another possible bout of intervention, having sent the pair above 150.00 for the first time since 1990.

The Fed’s Bullard said this week that the rapid interest rate rises in the US have contributed to the strength of the dollar against other currencies, a move which should ease once the Fed reaches the point of pausing rate hikes. That might make good reading to the growing army who have been publicly bemoaning the dollar’s ongoing strength, moans that have ranged from central bank heads to US CEO’s.

Aside from the dollar, it has also been a bit of a mixed bag on the data front in the US, with ongoing weakness in the housing market, offset by stronger Manufacturing growth across the country. The housing market weakness is perhaps no surprise, especially given the average 30-year mortgage rate is now probing 7%. That has helped to ensure that mortgage applications have diminished by 4.5% and housing starts declined by 8.1% (MoM/Sep), as housing projects quickly get shelved. On the positive side, manufacturing output rose more than expected through September, led by gains in both durable and nondurable goods. Manufacturing output rose 0.4%, taking output up by 4.7% (YoY).

CAD

The outcome of next week’s BoC meeting is a bit tougher to call than recent meetings, maybe excluding that infamous ‘100bps hike’ meeting. The latest estimates from a poll surveyed by Reuters suggest that a 50bps hike is on the cards, after the 100bps hike in July, and 75bps hike last month. However, the move is by no means set in stone.

The latest data in Canada has helped to cloud the outlook, with Inflation edging lower, but exceeding forecasts. The latest headline inflation came in at 6.9%, and just under the 7% reached last time. At the margin, it may have slightly increased the possibility of a larger hike, with some analysts moving to a 75bps hike after the inflation data was released.

Today’s (Friday) Retail Sales data might also have a bearing on analyst expectations from the BoC, with a 0.2% gain expected during August, after the surprising 2.5% decline in the previous month.

Elsewhere, Business sentiment has softened in Canada, with most businesses now thinking that a recession is likely, in data published by the BoC earlier in the week. Unsurprisingly, the survey highlighted that over 75% of firms see inflation remaining above 3% for the next two years.

As for the Loonie, well USD/CAD has gradually been trending lower over the past week or so, having failed to reach 1.4000, and moved as low as 1.3650, earlier in the week.

AUD & NZD

The latest Australian employment data was something of a disappointment, with only 900 (hundred) new vacancies filled, with analysts previously expecting gains in the tens of thousands. However, the overall jobless rate remains near a 48-year low of 3.5%, with further good news on the participation rate front, which just missed the record high at 66.6%. There is now roughly one vacancy per unemployed person throughout Australia, a ratio that had been 1-3 prior to the pandemic. On balance, the overall news may have just swung the barometer in favour of continued smaller hikes from the RBA going forward, with another 25bps expected next month.

Saying that, next week’s CPI data will probably be more defining. After a 1.8% (QoQ/Q3) jump last time round in headline inflation, markets expect softer 1.5% jump. The yearly rate is currently sitting around 6.8%, and will add to the expectation of further moves from the RBA, if persisted.  

In the RBA’s latest minutes, which were also released earlier in the week, the RBA said that their decision to reduce the size of hikes (from 50bps to 25bps) in their last meeting had been ‘finely balanced’, citing the accelerating risk of a global and domestic slowdown.

As for AUD/USD, the pair moved back above 0.6350 for a spell, for the first time in 10 days yesterday. NZD/USD followed suit, moving back over 0.5700, having struggled at 0.5500 this time last week.

 

Whatever your payment needs are, we've got you covered

Personal payments

Personal payments

You can enjoy competitive exchange rates and low fees on all your international payments with our personal account.

Find out more
Foreign exchange business solutions

FX business solutions

We provide tailored services to help companies make global payments and manage their foreign exchange risk.

Find out more