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Weekly Brief - 21st December 2018

EUR weekly currency update

The euro shared second place with the Swiss franc behind the Japanese yen. It added two thirds of a cent against sterling and took four fifths of a cent off the US dollar. Most of the economic data from the euro zone were unhelpful and last Friday's provisional purchasing managers' index numbers were particularly so. Every one of the national and pan-Euroland measures - manufacturing, services and composite - came in lower on the month and below forecast. The particular concern was France, which delivered readings of 49.7, 49.6 and 49.3. On the PMI scale of 0-100, anything below 50 represents contraction.

Concerns about the Euroland economy were offset by worries about the United States. The reaction to a rate increase by the Federal Reserve was ultimately negative, because it was feared that the Fed might have gone too far with its tightening. As investors moved out of the US dollar their first and easiest destination was the euro.

USD weekly currency update

It ought to have gone so well for the dollar. On Wednesday the Federal Reserve increased the funds rate by 25 basis points and pointed to two more rate hikes next year and one in 2020. Initially the reaction was positive. Yet within hours the word on the street was that the Fed was overdoing its policy tightening, and that it could adversely affect the economy (it had already hit the stock market - the DJ30 index is 5.5% lower on the week).

The few significant US economic statistics made little difference. A 0.2% monthly increase in retail sales was in line with forecasts. Housing starts and building permits were stronger than expected. The dollar lost a fifth of a cent on the week to sterling and went down by four fifths of a cent against the euro.

CAD weekly currency update

It was a difficult week for the Loonie, which lost three quarters of a US cent and fell by two cents against sterling. The domestic economic data were mixed. Manufacturing shipments unexpectedly fell by 0.1% in October while wholesale sales were up by an equally unexpected 1.0%. Inflation slowed from 2.4% to 1.7%, a lower rate than the predicted 1.8%. Most importantly, oil prices spent the week in retreat, falling by 11.3%.

The other factor working against the Loonie was US interest rates. The Federal Reserve delivered a widely-expected quarter-percentage-point increase but surprised investors with hints of two more hikes next year and another one in 2020. Investors took fright and lightened their holdings of commodity-related currencies. Their concern is that unduly tight monetary policy in the States could dampen not only the US economy but also affect the rest of the world, reducing demand for raw materials.

AUD weekly currency update

The Aussie had a marginally worse week that the Canadian dollar, losing four fifths of a US cent and falling by two and a quarter cents against sterling. It was not quite a one-way street but there not many upward corrections for the Australian dollar. Domestic economic data were fewer than usual and, although they were not particularly bad, neither were they good enough to bring out the buyers. New home sales increased by a useful 3.6% in November and 37k jobs were created in the same month, though that was not enough to prevent unemployment ticking up to 5.1%.

It was the US Federal Reserve that did most to dampen appetite for the Aussie. A widely-telegraphed increase to its benchmark interest rate was accompanied by an unexpectedly hawkish statement, which hinted at two more rate hikes next year and another in 2020. Investors worried that the Fed might be going too far, and that it could have a braking effect on the global economy which would reduce demand for commodities.

NZD weekly currency update

In a week that proved to be difficult for most commodity-oriented currencies the NZ dollar had an easier ride than some of its peers. The Kiwi lost a third of a US cent and fell by more than a cent against sterling. It nevertheless strengthened by half a cent against the Australian dollar. Investors were already wary of "risky" commodity currencies as a result of the global fall in equity prices. Their concern doubled after the US Federal Reserve raised its benchmark interest rate by another notch and pointed to further increases in the next two years. 

The NZ dollar got off more lightly than the currencies of other commodity exporters because the main exports of New Zealand are agricultural, not the raw materials and energy used in manufacturing. Its biggest problem was third quarter gross domestic product, which expanded by 0.3%. New Zealand's economy was supposed to have grown by twice that much in Q3, and investors' reaction was to mark down the Kiwi.

GBP weekly currency update

Given the heightened level of Brexit uncertainty, sterling's week went better than might have been feared. It lost two thirds of a euro cent but added a fifth of a US cent and strengthened by an average of 0.2% against the other ten most actively-traded currencies. The UK economic data told no coherent story. Rightmove's house price index was down by 1.7% in December. Headline inflation was in line with forecast at 2.3%. CBI surveys showed slower order growth among manufacturers and retail sales falling "notably" in December, though the official retail sales data for November were much stronger than expected even as consumer confidence fell to a 12-month low.

As Parliament packed up for the holiday there was still no clarity on the Brexit front and investors did not seem unduly concerned. The general sense is that they do not expect a "hard" no-deal Brexit because they believe the Commons would not permit such a dangerous move. What they do foresee - in no particular order of priority - is a soft Brexit, akin to the prime minister's withdrawal bill, a postponed Brexit, a referendum or no Brexit at all. 

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