The UK registered its worst trade performance in the first quarter of 2022, since accurate records began. Despite the ONS warning that their numbers were ‘subject to higher levels of uncertainty than normal’, the new system has been designed to be more accurate in the long run. The data highlighted that the UK’s current account deficit was now a whopping 8.3% of GDP (Q1/22), which is materially worse than the average print of 2.6% through each quarter last year. Overall, there was a 4.4% fall in real exports against a 10.4% jump in real imports.
That weak export performance when balanced against the surge of imports will heap further pressure on the government, given that exports have taken such a nosedive since the introduction of the new post-Brexit border controls at the beginning of last year. The BoE’s Bailey, who was speaking at this week’s ECB forum in Portugal, said that it was hard to differentiate the impact of COVID from Brexit, which is a shame, as we will never really know just how much of a negative impact on the economy Brexit has had. The final growth figures for Q1 were somewhat more pleasing, with GDP registering an as-expected 0.8% gain, driving the annual print at 8.7% (Q1/YoY).
Sterling has had a mixed week (so far). GBP/USD drifted back from over 1.2300, to just under 1.2100, but that move was mostly down to a surging dollar (see USD). GBP/EUR is still around 1.1600, but over the past 2 days, the pair has been as low as 1.1550, and as high as 1.1700, perhaps reflecting higher intra-day volatility.
Next week is fairly light in terms of keynote UK data, but the latest Halifax House prices are our pick of the bunch. Given accelerating weakness across many facets of the UK economy, it will be interesting to see whether those key house prices maintain their impressive growth profile, or whether those five BoE rate hikes will ultimately start to have a negative impact on the housing market, or not.
There was much anticipation leading into this week’s ECB forum in Sintra, Portugal, on the part of the ECB. Given that Madame Lagarde has steadfastly refused to budge from hiking rates by more than 25bps at the upcoming ECB meeting this month, markets were desperate for clarification that the ECB might be willing to make a bigger and bolder move in September. In the end, there was no such confirmation of a 50bps move, however, Madame Lagarde did keep the door open to larger hikes, if the economic data delivers in the meantime, suggesting that they were ready to ‘move faster’.
The big worry for the ECB is perhaps not about markets, but those rising borrowing costs for some of the regions more indebted nations. On that note, at an auction on Thursday, Italy has just had to pay the highest borrowing costs on its debt since the eurozone debt crisis, given that the ECB have now withdrawn ongoing support from its bond buying programme. Italy had to pay a yield of 3.44% on its 10-year bonds. The last time they had to pay that was over 8 years ago.
On the other side of the rate-hiking debate, inflation surged beyond 10% in Spain for the first time since the mid 80’s, and whilst there was some good news as German inflation surprisingly contracted, the overall picture of surging inflation for the region is still very much the order of the day, suggesting that the ECB should go bold and go bold soon. Interestingly enough, the latest region-wide HICP inflation data is out just after we go to press, which will give the ECB some food for thought. Keep your eyes on that one. All of this shows just how much of a challenge and balancing act it is for the ECB, especially at times of increased stresses amongst Euro area economies.
Jerome Powell’s determined attempt to fight inflation with his rate-hiking sabre took the steam out of what had been a pretty decent spell for markets up until the middle of this week. Whilst Powell did highlight that the Fed’s aggressive programme of hikes could ultimately tip the U.S into a recession, the fact that he remained resolute and committed with his ‘there is a clock running here, where we have inflation running now for more than a year’ line, left markets in no doubt that he is not about to waver.
Interestingly enough, the latest Core Personal Expenditures Price Index (catchy name) finally showed a slight reduction, with a 4.7% (YoY/May) increase slightly better than the 4.9% previous reading. However, if you add food and energy back in, there was no material change, and these numbers were calculated before the most recent pop higher in energy costs.
Elsewhere, there was another bit of better news on the housing front, with the latest Pending Home Sales increasing by 0.7% (MoM/May). However, given those rapidly increasing borrowing costs, it seems likely that this might be just a blip.
As for the dollar, well the greenback really started to make headway as we approached Powell’s speech in the middle of the week. Powell’s comments then only served to solidify those gains. The dollar index (DXY) briefly moved back over 105.00 for a spell yesterday, but a modest pullback ensued through the New York afternoon. EUR/USD moved back under 1.0400, but made a strong comeback too, moving towards 1.0500. USD/JPY slipped back from reaching a new cycle top of over 137.00, to under 135.50.
Next week it is all about the release of the minutes from the last FOMC meeting (Wed) and Friday’s May payroll report. Whilst there has been strong evidence of a slowdown amongst the flash consumer sentiment data, the labor market has remained remarkably robust. Any signs of a slowdown will be pounced on by markets, and will significantly impact the short-term profile of the greenback.
The Loonie has perhaps been the one outlier this week. With energy prices moving northwards, commodity currencies have fared better throughout the week, and the Loonie is no exception. USD/CAD has therefore bucked the trend and has been gradually tricking lower, after reaching a near 1.3100 high in the middle of the month, culminating in a dip to 1.2800 before the latest risk-off move finally encouraged some stronger greenback support. GBP/CAD has often been a much better barometer of overall CAD appetite, with the pair reflecting the broader strength for the Loonie, slipping back under 1.5700 though the week.
Looking ahead, next week’s Canadian employment report will be key given that we are rapidly approaching the next BoC meeting (mid-July), where we should expect another bold hike, unless there are strong reasons for the BoC to change tact. Whilst unemployment is likely to track slightly higher to 5.2% (from 5.1%), that alone is unlikely to sway the BoC. Onwards and upwards then.
AUD & NZD
The Aussie dollar kept within a tight 100 pip range against the greenback throughout last week, which is a reflection of the lack of keynote data and events in the region. The latest Australian Retail Sales were perhaps the pick of the bunch, with a healthy 0.9% (MoM/May) gain following on from similar gains previously. That was well ahead of market expectations, and will give the RBA some comfort as we approach the next RBA meeting.
Talking of which, the RBA meet next Tuesday, where they will likely either raise rates by 25bps or 50bps, given the ongoing surge in inflation. The meeting is likely to encourage some short-term volatility into AUD/USD, which has been quiet, but remaining toward the bottom of the recent range at 0.6900. Given the distinct lack of keynote data in New Zealand, we should perhaps expect the Kiwi to follow the Aussies moves until we approach the new RBNZ meeting.