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Yet another final Brexit deadline


Sterling had a good week, strengthening by an average of 1% and taking the top position on the podium. It got a lift last weekend when the UK Prime Minister and the President of the European Commission decided to “go the extra mile”, bypassing Sunday’s deadline in the hope that a post-Brexit trade deal could be agreed after further talks. Nearly a week on, it is looking more like two miles but the negotiations go on, accompanied by the usual rhetoric from the two parties. The Prime Minister continues to insist that a no-deal Brexit is “very likely” and the EU has set yet another deadline; if there is no agreement by the end of this weekend the European Parliament will not have time to approve it before the end of December.

Investors nevertheless remain optimistic that there will be an agreement. They ignored some quite unpleasant UK economic data for employment, inflation and retail sales and took the pound to its highest level against the US dollar in two and a half years. They were not encouraged by the Bank of England’s fairly downbeat assessment of the economic outlook but neither were they surprised.



Although it was not a stellar week for Europe’s common currency – it was on average just about unchanged – the euro still managed to take another cent off the stuttering US dollar. Technically, it shows every sign of being able to regain the highs of early 2018 around $1.25, with the prospect of another three US cents above that if the stars line up. Investors are not unduly concerned by the new lockdown in Germany, which will last until at least 10 January. The government is trying to reduce the impact on the economy by the provision of €15 billion of support to businesses.

There were no shocks from the relatively few Eurozone economic data. Inflation was unchanged for a third month and in line with analysts’ forecast at -0.3%. Nationally, the rate ranged from Greece’s -2.1% to Slovakia’s 1.6%. The provisional purchasing managers’ indices for the Eurozone were ahead of forecast with the composite close to breakeven at 49.8. German manufacturing at 58.6 was a 34-month high. Eurozone industrial production increased by 2.1% in October, leaving it 3.8% lower than the same month last year.



It was not a great week for US economic data or for the US dollar, which lost an average of 0.6%. The best result was last Friday’s provisional index of consumer sentiment from the University of Michigan. At 81.4 it was 5.9% higher on the month and 18% above December last year. The worst was the retail sales figures for November, which revealed a monthly decline of 1.1%, almost four times the expected drop. In between, the New York Fed’s manufacturing index was a slightly disappointing but unremarkable 4.9 and the provisional PMIs showed the recovery momentum waning (amid rising virus cases and supply delays).

As expected, the Federal Reserve left the target range for the federal funds rate at 0 to 0.25 percent and said it would continue to spend at least $80 billion a month on the purchase of Treasury notes and bonds. The “dot plot” in the bank’s economic projections showed that only one FOMC member expects rates to move higher before the end of 2022. Negotiations about renewed fiscal stimulus drag on in Congress. As with Brexit, an eleventh-hour agreement is possible but not guaranteed.



The Loonie had an even worse week than the US dollar, falling by an average of 0.8% and losing three cents to sterling. Against the Greenback it rattled back and forth across a one-cent range, changing direction almost on a daily basis. There was nothing among the Canadian economic data to justify the volatility. Housing starts were above forecast after two months of decline. Manufacturing sales increased by a monthly 0.3%, less than expected but not adrift from pre-pandemic levels. Inflation picked up to 1%, its highest level since the 2.2% recorded in March. House prices rose by 0.9% in November, the strongest gain for that month in the 22 years of the Teranet index.

Bank of Canada Governor Tiff Macklem warned in a speech that the recovery of the Canadian economy is at “a very difficult stage”. He noted that “so far, household spending has led the way but, for the economy to fully recover, it needs to be firing on more than one cylinder”. One commentator noted that Mr Macklem, in common with his colleagues at the Fed, the European Central Bank and the Bank of England, insisted that “we do not target the exchange rate, the exchange rate is set by the market”. If so, he asked, “why is it suddenly a discussion point for central bankers?”



The Aussie and the Kiwi were unchanged against one another, both losing an average of 0.2% to the other major currencies. Against the GBP, the AUD was down by a little over two cents and it added a quarter of a US cent. The few Australian ecostats were kind to the AUD. Provisional purchasing managers’ indices from Markit were higher on the month and well into the expansion zone above 50. Manufacturing at 56.0 was a three-year high. New home sales rose by 15.2% in October to a ten-year high. The employment numbers looked good too, with 90k new jobs in November, most of them full-time positions, and the rate of unemployment down to 6.8%.

There was trouble at the pit though. Global Times, a Chinese state medium, reported that China will prioritise imports of coal from Mongolia, Indonesia and Russia. At the same time, imports from Australia will need specific approval. Some 60 bulk carriers, with hundreds of millions of tons of Australian coal, are already stranded off the coast with nowhere to go. China is irritated by Prime Minister Scott Morrison’s opposition to its territorial expansion and his siding with Washington to investigate the origin of the tragic Covid-19 pandemic.



As usual, the NZ dollar did not have much to say for itself. The domestic ecostats were not wonderful but brought no nasty surprises. Predictably, visitor arrivals in October were down by 96.8% from the same month last year. That is what happens when borders are closed. Business NZ’s Planning Forecast reported that the economy is “better than expected”, despite a four-point dip in the Performance of Services Index to 46.7. Gross domestic product rebounded by 14% in the third quarter after shrinking 11% in Q2. The balance of trade improved to a $252 million surplus in November as imports fell and exports held steady. ANZ’s Business Outlook noted that “Headline business confidence, at 9.4%, is up a whopping 16 points and back in the black for the first time since August 2017”.

There was nothing there to hurt the Kiwi but neither was there anything surprisingly positive. As a result, the NZD remained fairly closely tied to the AUD, remaining within a range of less than one cent. The pair were unchanged on the week against one another, an average of 0.2% lower against the majors. The NZD lost two and a quarter cents to the GBP.

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