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Problems with deals

GBP

To nobody’s great surprise, the government missed its last possible deadline for agreement with the EU on a post-Brexit trade deal. The intention had been to present the European Council with a draft agreement on 19 November. Now, in a triumph of brinkmanship for negotiations that began more than four years ago, the target is 28th December, with officials working through Christmas to prepare the treaty, should there be one. To add to this, Britain’s Prime Minister is isolating as a result of the test and trace process, while a senior EU negotiator has caught the infection.

Investors expect a deal to materialise, especially since President-elect Biden drew his red line around the Belfast peace agreement. But they are not unreservedly optimistic. Because of that, the pound put in a proper emerging-market performance, alternating daily between first and last position (sometimes jointly) among the major currencies. Over the week it strengthened by an average of 0.2%, adding half a euro cent and one and a half US cents.

 

EUR

Ten days ago, after months of wrangling, the European Parliament and the European Council agreed a €2 trillion stimulus package. Within days, Hungary and Poland vetoed it because they insist they are being unjustly treated for political reasons. They are refusing to back down. The assumption is that they will, because to block the stimulus would be an act of economic self-harm, but it looks unlikely that they will do so in time for disbursements that had been planned for early January. The dispute gave EC leaders something to talk about at their virtual summit on Thursday, which had been intended to focus on the Brexit deal.

EU economic data did not figure highly in the fortunes of the euro. Eurozone inflation was steady at -0.3%, with national variations between Greece’s -2.0% and Slovakia’s 1.6%. European Central Bank President Christine Lagarde said in an interview that Covid vaccines are not necessarily “a major game-changer” for the bank’s economic forecasts. She gave the impression that when it “recalibrates” its stimulus next month the ECB will pump up its monetary support. The euro lost an average of 0.3% over the week and added three quarters of a US cent.

 

USD

Trump continues to insist that he won the election on 3rd November, denying President-elect Joe Biden the chance to prepare for the transition in January. A manifestation of that intransigence was when his Treasury Secretary instructed the Federal Reserve to return to the Treasury reserves intended to calm stressed markets. The Fed Chairman said no, raising concerns about the harmony of US monetary and fiscal policy.

The USD was the weakest among the major currencies, falling by an average of 1%. It is down by 2.1% from a month ago. The consensus among analysts is that it will weaken further. Citibank expects a drop of as much as 20% for the USD in 2021, if Covid vaccines become widely available and global trade and growth are revived. Goldman Sachs is less aggressive, looking for a 6% fall next year. The weaker dollar prognosis is not unanimous though. TD Securities foresees renewed demand because “a little bit too much” optimism has been priced into the market.

 

CAD

For reasons impossible to fathom, the Loonie was almost unchanged on the week against the euro, the Swiss franc and the Swedish krona. It fell by an average of 0.3%, losing three quarters of a cent to sterling and picking up half a US cent. A 3% rise in oil prices, which helped the NOK into first place, did influence the CAD but was not enough to overcome the drag of the USD. Appearances by Bank of Canada Governor Tiff Macklem and Deputy Governor Carolyn Wilkins were not of much assistance either. Mr Macklem’s comments came in the context of climate change, not monetary policy.

There were no problems among the Canadian economic data, almost all of which either met or exceeded forecast. A 1.5% increase in manufacturing sales more than compensated for the previous month’s 1.4% decline. Wholesale sales “grew 0.9% to $66.2 billion in September and remained higher than February's pre-COVID-19 level for the third straight month”. Headline inflation came in at 0.7%, a four-month high.

 

AUD

Although, after nine years in the making, the ASEAN-centric Regional Comprehensive Economic Partnership (RCEP) should not have come as a surprise, it did appear quite suddenly on the western radar when it was signed last weekend. The partnership brings together 15 nations, including Australia and New Zealand, and embraces nearly a third of the world’s population and GDP. RCEP could add $500 billion to world trade by 2030.

Among a handful of appearances by Reserve Bank of Australia heavyweights, there were few references to economic and monetary policy. Governor Philip Lowe covered the subject fairly comprehensively, without offering any hostages to fortune. His summary was that “economic policy will also continue to adjust to our changing circumstances”. The highlight of the domestic economic data was employment. Unemployment rose to 7.0% even as the participation went up to 65.8% with the addition of 179k jobs. Investors were underwhelmed and the Aussie did not budge. On the week as a whole, it was just about unchanged on average and half a cent lower against sterling.

 

NZD

As with the AUD, New Zealand’s participation in the RCEP can be expected to be positive for trade over time. The Kiwi did start the week strongly but that probably owed more to the weakness of the US dollar than to any trade optimism. Overall, the NZD came second behind the NOK, strengthening by an average of 0.6%. It picked up one US cent and went up by four fifths of a cent against sterling.

NZ data were in typically short supply. The tendency of Statistics NZ to publish data on a quarterly, rather than monthly, basis means that there are 75% fewer ecostats than most other countries. One of those quarterly releases was the business price indices for the third quarter. It showed manufacturers’ costs rising by 0.6% over the three months to September while factory gate prices fell 0.3%. The Reserve Bank of New Zealand’s monthly measure of credit card spending put spending in October 6.3% lower than in the same month last year.

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