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Weekly Brief - 19th October 2018

EUR weekly currency update

Only sterling had a less productive week than the euro. The single currency lost a cent and a half to the US dollar and fell by an average of 1.0% against the other majors. It did, however, add two fifths of a cent against the benighted pound. When Italy's general election delivered a hybrid right/populist coalition government in March investors worried briefly that the promise of a reduced retirement age, a universal income and lower taxes might prove to be fiscally toxic. Then, when nothing happened along those lines, they relaxed.  

They are not relaxed now. The coalition is adamant that it will run a budget deficit of 2.4% in 2019 and the European Commission is adamant that it can't. The effect has been to increase the cost of ten-year borrowings by the Italian government to three and a quarter percentage points more than Germany pays. The alarm bells are ringing loudly and investors  are unenthusiastic about the euro.

USD weekly currency update

There were times when the dollar showed promise and it did indeed put in a better-than-average performance. However, the result was as much to do with other major currencies' failure as it was to do with the dollar's compelling virtues. The euro had a tough week, losing one and a half cents to the dollar and the pound had a miserable one, losing nearly two and a quarter US cents.

Two events that helped the dollar ahead - though were not in themselves huge factors - were the minutes of the Federal Reserve's September policy meeting and the Treasury Department's decision not to list China as a "currency manipulator". The minutes reassured investors that the upward course of interest rates would not be diverted by the president's frequent objections ("the Fed is his "biggest threat"). The Treasury's failure to accuse China of currency manipulation reassured them that a new front was not about to be opened in the trade war.

CAD weekly currency update

On average the Loonie was just about unchanged against the other ten most actively-traded currencies. It lost a quarter of a US cent and strengthened by two and a quarter cents against sterling. Monday's quarterly Business Outlook Survey, published by the Bank of Canada, was of considerable help.  The results were upbeat, further shortening the odds that the BoC will increase its benchmark interest rate at Wednesday's policy meeting.

Meanwhile the pound was having a 'mare. The festering threat of a no-deal Brexit showed no sign of respite, especially when the prime minister tried and failed yet again to sell her proposal to EU leaders. On the UK data front, good figures for wage growth were overshadowed by an unexpected inflation slowdown and a fall in retail sales. Uncertainty is the order of the day in Britain and investors are as wary as ever about the future of sterling.

AUD weekly currency update

The Aussie was flat, on average, against the other major currencies.  It lost a seventh of a US cent and strengthened by two and three quarter cents against sterling. The Australian dollar was eclipsed by its NZ cousin, losing one cent. Thursday's employment data were the Aussie's statistical highlight. Job creation in September - 5.6k - was smaller than forecast but the rate of unemployment fell to 5.0%, a six-year low.  Investors decided to focus on the 5.0% instead of the 5.6k and the Aussie moved higher.

The statistical highlight of sterling's week was Tuesday's report that UK earnings growth had overtaken consumer prices. That good news was forgotten when subsequent figures showed inflation slowing and retail sales falling. And all along the way the pound had to contend with the dismal Brexit narrative: the prime minister offers a proposal; the EU rejects it; repeat ad nauseam. 

NZD weekly currency update

The Kiwi had a great week, strengthening by two fifths of a US cent.  Sterling had a shocker, losing four and a half NZ cents and falling by an average of 1.4% against the other major currencies. Tuesday's inflation figures provided the Kiwi's most obvious boost. Consumer prices went up by 0.9% in the third quarter, taking inflation to 1.9%. Investors had been looking for 1.7% so they showed their admiration by marking up the NZ dollar. 

Admiration for sterling was sadly lacking. Investors quite liked  the acceleration in UK wage growth but they were disappointed that inflation had slowed to 2.4% and that retail sales had fallen in September. They were also more than a little concerned that the Brexit narrative had evolved into predictions that there would be no deal between Britain and the EU.  Investors fear that a no-deal Brexit would be the worst of all possible economic worlds for Britain and the pound.

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