Weekly Brief

Weekly Brief

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No-deal Brexit spooks investors - again

GBP

Whatever warm thoughts investors had about sterling last Thursday night started to cool on Friday morning and became positively arctic as the week progressed. The pound was the weakest among the major currencies for five days on the trot, losing an average of 3.4% over the seven days. It started this Friday 1.6% below its position, ahead of the supposedly sterling-positive General Election. The problem, and it is a significant one, is that the government will write into legislation 31 December 2020 as the end date for the transition period, such that there can be no extension even in the absence of a trade deal.

In other words, it is game-on again for a no-deal Brexit. Whether or not investors really believe the Prime Minister would take the drastic step of marching Britain over a cliff at the end of 2020, that is the hand they have been dealt by Downing Street and the only way to play it is to stay away from the pound.

EUR

The euro had little to say for itself. It plodded along in the middle of the field, making accidental headway against the retreating pound with a net gain of three and half cents. It lost half a US cent and was unchanged against the Australian and NZ dollars. There were no political developments of any consequence and the European Central Bank added nothing to the monetary policy debate.

So it was really down to the economic data, and they gave the euro little to shout about. The most helpful contribution was IFO's survey of German business confidence, which echoed recent findings by Sentix and ZEW; "sentiment among German executives has improved noticeably". Inflation was neutral: at 1% it was up from the previous month's 0.7% and in line with the provisional reading. There was less joy to be found in the provisional purchasing managers' index readings. German manufacturing scored a dismal 43.4, a point short of forecast, and the euro zone as a whole sank further into recession at 45.9.

USD

Last Friday's US retail sales figures were uninspiring. The headline 0.2% monthly increase in November was well below the expected 0.5% and the control group - the component used in the compilation of personal consumption expenditure - rose a feeble 0.1%. The New York Fed's manufacturing index was "little changed". Markit's provisional purchasing managers' index readings highlighted the difference between the economies of the States and Europe. Manufacturing and services were both comfortably within the expansion zone at 52.5 and 52.2 respectively. The most impressive statistic was the NAHB housing market index, a measure of confidence among builders. At 76, it was the highest reading since June 1999.

The real headline-grabber was the Democrat-led House of Representatives' impeachment of the President. Trump is only the third president to suffer that fate. It made no difference to the dollar because a) it is a purely political exercise and b) it is widely expected that he will be acquitted by the Republican-led Senate in the New Year. The dollar strengthened by four and a half cents against sterling and by half a cent against the euro.

CAD

On average, the Canadian dollar strengthened by 0.2% against the other major currencies. It added a fifth of a US cent and went up by six and a half cents - 3.6% - against the benighted pound. Oil price movement was a positive for the Loonie: WTI crude went up by nearly 4% over the week to its highest level since mid-September.

The Canadian data were mixed. Manufacturing sales fell 0.7% in October, having been expected to be unchanged. Inflation was in line with forecast at 2.2%, up from the 1.9% reported for the previous three months. Wholesale sales disappointed, falling 1.1% in October. Four of the seven sectors reported lower sales with machinery, equipment and supplies contributing most to the decrease. ADP's employment change report showed an increase of 30,900 jobs in November, better than the previous month's 2.9k rise but well short of the expected 66.6k increase.

AUD

The antipodean dollars did not move far from one another, the Aussie losing out fractionally to the Kiwi. It strengthened by more than five and a half cents - 2.9% - against the retreating pound and lost a third of a US cent. The minutes of the Reserve Bank of Australia policy meeting sent the Aussie lower because the RBA said it was "prepared to ease monetary policy further if needed". 

To an extent the Australian economic data supported that view. Markit's provisional purchasing managers' indices "pointed to a further marginal decrease in business activity" with manufacturing at 49.4 and services at 49.5, both lower on the month. Mortgage lending was less robust than expected in October. But employment beat forecast with 40k new jobs (admittedly most of them part-time positions) and a downward tick in the rate of unemployment to 5.2%.

NZD

The NZ dollar had the edge over the Aussie but only just. It went up by six and a quarter cents - 3% - against the pound and lost a fifth of a US cent. Neither the Kiwi nor any of the other commodity-oriented currencies did as well as might have been expected as a result of last week's trade deal between Washington and Beijing. Investors can imagine many pitfalls - and many years - between that "phase one" agreement and a comprehensive trade treaty.

NZ economic data were moderately helpful. Business NZ's services PMI was lower on the month but still positive at 53.3. Consumer confidence improved by six points to 109.9 and business confidence jumped another 13 points to -13.2. ANX noted that "Services and manufacturing are the most upbeat sectors; construction remains the least optimistic but is improving rapidly." Gross domestic product expanded by 0.7% in Q3, not a huge amount for three months but more than expected.

GBP: Gives up election gains and more

GBP: Gives up election gains and more

EUR: German industry still a bugbear

EUR: German industry still a bugbear

USD: President impeached, nobody cares

USD: President impeached, nobody cares

CAD: Higher oil prices help

CAD: Higher oil prices help

AUD: RBA minutes bad, jobs good

AUD: RBA minutes bad, jobs good

NZD: More confidence, more growth

NZD: More confidence, more growth

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