N Ireland legislation change threatens pound
The pound slid sharply against the US dollar and euro yesterday after reports in the UK media that the government was preparing emergency legislation to reverse parts of Withdrawal Agreement protocols on Northern Ireland, in the event of a no-deal Brexit. This increased the concerns in currency markets of a no-deal on trade. In reality, it might likely be yet another bargaining chip that the UK is attempting to use to get its way on contentious matters in the negotiations. The financial markets are right to be concerned though, as thus far neither side has seemed willing to make concessions. The pound is now 3% off of last week’s highs versus the USD and over 1% lower versus the euro, while little deterioration has been seen in the UK’s economic data or surveys. It would seem therefore that the markets are taking a greater cue from Brexit trade developments, and the changing probabilities of a trade deal or WTO rules applying from 1st January 2021. The only outperformance came from the UK equity market, which rose by more than its major European rivals. That though is likely to be because more of its corporate earnings are in foreign receivables than sterling, so a drop in the pound boosts the value of those earnings when converted back into GBP.
Overnight we had the BRC retail sales monitor for August. The shop price index recorded a sharper rate of price deflation in August than in July, when it was released last week, so the markets may have feared a weaker outturn. In actual fact, sales values grew by 3.9% YoY, up from the July reading, and the figures were more impressive on a like-for-like basis where sales values were up 4.7% YoY. The pound wasn’t energised by the overnight reading, but it shows that retail spending held up, despite the reopening of services and the Chancellor’s ‘Eat Out to Help Out’ scheme, which could have diverted spending into hospitality and away from the high street. The UK’s next release isn’t until early Thursday morning, which is the August RICS house price balance survey. Both the Nationwide and Halifax house price indices reported prices at record highs in August, and the consensus is for a jump in RICS index to +25 from +12 in July. The outturn of this survey is expected to be confirmatory or contradictory, and either way FX markets aren’t likely to move much on this.
Mixed signals from Germany
A week ago Germany was talking about using funds from the EU’s recovery fund to pay for existing spending plans in what was seen as a clear signal to the financial markets that the German government wanted to keep a lid on overall spending. Yesterday though, the German Finance Ministry struck a different tone. Deputy Finance Minister, Werner Gatzer, suggested that whilst German fiscal policy should return to “normality”, as his boss Olaf Scholz said last week, normality wasn’t necessarily ‘black zero’, a term coined to describe Germany’s policy of a balanced government budget with no new borrowing. Gatzer’s comments come in the context of the German government’s desire to invest more in digital technologies and become more environmentally sustainable. German government fiscal rules don’t allow for substantial structural deficits under any circumstances, with the constitutional debt brake restricting them to 0.35% of GDP. Any rewriting of the fiscal rules, however sensible, would face potential challenge in the constitutional courts, and that is unlikely to be helpful for the euro.
In terms of the euro, it slipped further against the US dollar yesterday and overnight dipped to a low of $1.1795. Last week’s low of $1.1781 is not far away, and there are no fundamental banana skins for the US dollar to help out the euro ahead of Thursday’s ECB Governing Council meeting. The euro should have been helped by a larger than expected improvement in the Sentix investor confidence index for September, which rose to -8 from -13.4 in August. Irish GDP figures for Q2 reported a 6.1% decline in output on Q1, and Q1 output was revised to a decline of 2.1% on the quarter, having previously been estimated to rise by 1.2%. In terms of the Eurozone data and surveys, today’s final Q2 GDP figures could offer a small upward revision to the previous estimate, whilst Q2 employment data is likely to record a very sharp decline, after a near 3% decline in Q1. Is the euro likely to revisit last week’s lows against the US dollar, and if it does will it find any support this time?
Yen’s woes and Aussie’s boost
Japan’s final Q2 GDP figures reported a modest worsening versus the previous release, but less than the markets expected. That really wasn’t the main news though, as July figures for household spending were released just ahead of the GDP figures. These showed that spending had slumped again in July after the sharp improvement in June. Any recovery in the Japanese economy will need the support of consumption expenditure, but these figures demonstrate that we are some way away from that. Spending was, in fact, below March’s levels, after the coronavirus crisis began. The yen was little moved on the spending news, but this poor start to Q3 from a key variable undermines the case for a strong Q3 recovery and increases the risks of additional monetary loosening from the Bank of Japan.
Surveys from Australia overnight pointed to a pick-up in business confidence in August and an improvement in labour market conditions. Current business conditions dropped back a little in August, but that is understandable given the renewed lockdowns in some states. The news seems to confirm that Australia has weathered the Covid-19 pandemic well so far, with business conditions seen only marginally worse than pre-pandemic along with business confidence. The Aussie dollar has risen marginally on this news, but is still wary of pushing higher versus the USD, after warnings from the RBA at their most recent meeting.
Swedish industrial production and orders data for July reported additional rebounds after increases in June. Private sector production was up 3.7% in July and orders rose 5.5%. Against last year, this left the figures down 4.1% and 6.4%, respectively. That’s a decent recovery given the evolution of the virus in Sweden, who never adopted full lockdown measures, unlike the vast majority of other European countries. The Swedish krona hasn’t really reacted to the data, but the Riskbank will feel under little pressure to adopt additional loosening measures whilst the economy continues its recovery, so the production figures are/were mildly supportive overall.