Weekly Brief

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Weekly Brief - 28th September 2018

EUR weekly currency update

With little new economic data on offer, investors had to look to central bankers and politicians for their inspiration. On Monday President Mario Draghi spoke enthusiastically of "relatively vigorous" inflation, leading many investors to infer that higher interest rates might be on the way. The following day his chief economist played down the remark, saying it did not signify a change in policy. They cancelled each other out. On Thursday morning the euro headed lower after a report that the Italian government might be about to break the EC deficit rules. Overall it lost one and a quarter US cents.

The euro took a third of a cent from sterling though. A speech by Theresa May last Friday, in which she threatened a no-deal Brexit, sent the pound tumbling  1.6%. It spent the last four days gamely trying to make back the loss but it did not quite manage to do so.

USD weekly currency update

The Federal Reserve raised US interest rates and the dollar strengthened on most fronts but it was not really a case of cause and effect. The quarter-percentage-point increase in the federal funds rate (the new target range is 2 - 2.25%) had been priced into the dollar for months, as had the prospect of another increase in December, plus three more in 2019 and a couple the following year. The real boost for the dollar was Thursday's news that Italy was about to announce a fiscally-lax budget deficit. For investors who wanted out of the euro the dollar was the easiest alternative. It took a net cent and a quarter off the euro.

And it took nearly two cents off sterling, which tanked last Friday when Theresa May spoke seriously about a no-deal Brexit. The pound spent the first three days of this week making back some of the loss but it suffered collateral damage on Thursday as result of the Italian budget scare.

CAD weekly currency update

The Canadian dollar had a difficult week: the pound had an even more difficult one. The net result was a gain of four fifths of a cent against sterling and a loss of three quarters of a US cent. In the Loonie's case it was the obsolescent North American Free Trade Agreement that hobbled it.  Washington and Mexico are ready to sign a replacement agreement but Canada is unhappy with the new terms. The Loonie fell on Wednesday after the White House said it would press ahead with the Mexico deal whether or not Ottawa wanted to play. For good measure, Trump refused to meet with the Canadian premier.

Sterling's problem was last Friday's speech by Theresa May, in which she warned of a possible no-deal Brexit. It lost 1.6% almost in a single stroke, which it spent the following days doggedly trying - and almost managing - to make back.

AUD weekly currency update

Other than an unremarkable 0.5% monthly increase in private sector credit there was no Australian economic data to guide investors. As a result the Aussie dollar drifted with the current as risk-appetite and the Trump trade war narrative ebbed and flowed. For the AUD/USD relationship there was more ebbing than flowing. The Aussie took a particular hit on Thursday when a scare about the fiscal probity of the Italian coalition sent the US dollar broadly higher. Overall the Australian dollar lost four fifths of a US cent.

It took half a cent off the pound. Sterling had an awful day last Friday, courtesy of a prime ministerial speech which shortened the odds against a no-deal Brexit. The pound fought back, leading the way on Monday and Tuesday, but was eventually unable to win back all of Friday's lost ground.

NZD weekly currency update

The two most important determinants of the Kiwi's week came on Wednesday morning: the trade deficit for August and ANZ's measure of business confidence in September. The trade deficit was a record $1.5bn and business confidence rebounded by 7.8%. Investors almost completely ignored the deficit but seized upon the improvement in confidence, sending the Kiwi more than half a cent higher. The differing treatment reflects the contrasting importance of business confidence, which can influence Reserve Bank of New Zealand policy decisions, and trade, which seldom does. The NZ dollar added a net sixth of a cent against sterling and lost nearly one US cent.

Sterling came to grief last Friday when Theresa May spoke about the serious risk of a no-deal Brexit. It spent the first three days of this week trying to make back the deficit but was eventually unable to do so. 

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