It’s the night before Christmas, and it appears sterling is to finally get the present at the top of its wish-list, the one it’s been asking for since 2016. But after a few days that have felt like a lifetime, after years of debates, fraught negotiations, false dawns and at times outright unpleasantness, it appears today will be the day that the UK and European Union finally agree to a deal that will set the legal framework and terms for a post-Brexit trading relationship. The deal is described by those in the know as “imminent”, at 11am apparently. But after being so patient for so long, sterling certainly hasn’t waited for details in order to unwrap its surprise.
Christmas has come early for the pound. Off the back of the Brexit news, and as you might expect, sterling has gone from zero to hero. Having already gained 1.2% across the board on Wednesday by New York close, there has been another 0.4% in Thursday morning Asian trading. This trend will continue today, meaning sterling will end the week well ahead of the pack and climbing.
But it could have all been so different. By Tuesday, sterling looked set for the lump of coal from Santa, as sterling suffered from the Saturday announcement of a new tighter restrictions on large parts of the UK, after a new coronavirus variant strain found to be 70% more transmittable was found to be “completely out of control”. France announced the 48 hour closing of the border, over 40 countries blocked UK arrivals, and GBP slid. Yesterday millions more were placed under Tier 4 constraint, albeit after Boxing Day, making it almost inevitable that there will be another lockdown and recession in the first quarter of next year. But that’s not the story sterling is telling as this week draws to a currency close. As it drives back up towards the November highs against Aussie and Kiwi, and a seemingly relentless march to 1.36 against USD. That would be the highest on cable since springtime 2018.
It was a bad week for EUR/USD, with Tuesday’s 1.2159 close the worst since December 16th. Despite it being GBP feeling the fuller brunt of trade blocks and other border closures, EUR also suffered, as The European Commission warning that borders with the UK must be opened by member states in order to avoid supply chain shortages on the continent. The euro lost out to safer havens. Earlier in the week German consumer confidence was hit by the consequences of another partial lockdown in November, despite business confidence being better than expected last week. German import prices rose for the seventh straight month yesterday, helping to perhaps explain the disconnect between individual and business outlooks.
The news from Brussels yesterday did allow a recovery of sorts, with the 0.2% average again seeing the euro make up some lost ground on USD, CHF and JPY as New York bid adieu. This morning in Asia there were further small gains, but with euro not safe enough in the bad times, and now not exciting enough in the good, it looks set to be the worst performer in the penultimate week of the year. Slightly Scrooge-like considering the sigh of Brexit relief no doubt on the continent as well. The euro is currently losing out to the same CAD, AUD , and NZD on risk; having lost out to the USD on the same principle earlier in the week. Some single currencies just can’t catch a break.
The dollar is still the reserve currency of the world and the main benefactor when FTSEs, S&Ps and Nasdaqs fall, which they had been. But that has now all changed and the dollar is in retreat. Also, what’s good for the US is good for the global economy, and unemployment claims the lowest in 3 weeks and 85K less than forecast offered some good news yesterday, building on the renewed market optimism. Elsewhere, New Home Sales missed estimates by a whopping 150k to post the lowest number since July, suggesting renewed Covid-caution; although the House Price Index jumped by 1.5%. Personal income dropped by another 1.1% compared with the previous month. Mixed.
The dollar was already wavering early Wednesday, after Donald Trump had vetoed the Covid relief bill; disgruntled by several aspects he deemed “unconstitutional”. The bill is part of wider cash injection needed in order to keep public services funded through to the New Year and it is now up to Congressional Republicans to decide whether they overrule the outgoing President, or go back to the drawing board. Confusing.
Having been such a strong performer since March, it would be premature to read too much into the Canadian dollar’s disappointing performance this week, and perhaps instead, a reflection of some end-of-year profit-taking. Regardless, the loonie looks likely to wake up on Christmas morning as the worst weekly performer other than the euro.
But any rally pause may be short-lived. New house sales may have missed estimates, but they are still positive numbers, and yesterday’s GDP figure showed a sixth month of growth that beat forecasts at 0.4%. In the last 12 hours of markets, all export-driven economies have seen their currencies ride the wave of a more stable global outlook, now the EU and UK have decided to play nice. CAD indices is down on the week, but up 0.4% after the Asian session.
Australia becomes one of the first countries outside of the UK to report a case of the new, more contagious, Covid strain. Along with the announcement of new restrictions coming into force over Christmas, the Aussie dollar had found itself losing big to the havens of Japan, Switzerland and the US, with USD/AUD touching 1.33 on Tuesday for the first time since early December. But now the turnaround, thanks to events in the Northern hemisphere. The Australian Dollar Index was up 0.8% Wednesday, leading the peloton behind the pound. 0.65% better against the majors so far since European opening suggests another strong day. With less than half a percent to go before the 1.3090s, USD/AUD could be about to see 2018 levels again.
The 7% jump in November Retail Sales confirmed earlier in the week may also help traders see the attraction in the Aussie they chose to ignore. Understandable to be fair, when everything appeared doomed on Monday.
Dull as dishwater on the economic data front and minding its own business as a global pandemic rages, you suspect that’s just the way New Zealand likes it. Summer there as well. The kiwi will always live and die by the confidence in the global economy and supply chains, and this week proved no different. Worldwide panics early part of the week had NZD the very worst bet out there, with AUD/NZD breaking through 1.07 for the first time in a month. USD/NZD broke 1.42 for the first time since December 10th.
But with European deals comes joy; with joy comes risk; and with risk comes the kiwi dollar. 0.75% of gains vs. major peers on Wednesday and outshining everything but the pound so far today, up another 0.8%. USD/NZD has settled back below 1.41 and at this rate, the 1.39 levels last seen in April 2018 could be under threat.
Merry Christmas one and all. But mainly for pound sterling.