Weekly Brief

Weekly Brief

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Surprise, Surprise

GBP

The pound has steadily been making gains throughout the week, although the momentum dropped off as the week went on. There were positive data to back the move. Last week, the Distributive Trades Survey found retail sales rising for the first time since November last year and the Industrial Trends Survey found manufacturers stockpiling, with inventories of raw materials, work-in-progress and finished goods growing at the fastest pace on record. This week, Nationwide's house price index 0.4% higher in April, up by 0.9% from a year ago. There was also good news from the Bank of England; while the central bank kept the interest rate unchanged at 0.75% as expected, the growth forecast was revised up to 1.5% this year, from 1.2% in February. There is still a measure of caution from the Monetary Policy Committee, which appears to be waiting until a clearer picture of the impact of Brexit before making any changes. 

There was some good news on the Brexit front, which drove most of the rise in the pound this week. News that a breakthrough in cross-party talks had been made gave sterling a boost. The Labour Party’s National Executive Committee came to a decision on the idea of a second referendum; the opposition will push for this if the deal doesn’t get through parliament, unless a General Election is called. Given the losses for both major parties at the local elections this week, neither major party would seem likely to wish to take their chances at the polls. While all the votes are still being counted, one clear result is that pro-Remain parties, including the Liberal Democrats and the Green Party, made significant gains at the local level. It’s clear that the way ahead is not likely to be plain sailing, and the pound may see further volatility in the coming weeks. 

EUR

The European Central Bank is remaining cautious over the slow-down across Europe, but there was positive news reported from the continent this week. Italy's economy expanded by 0.2%, pushing them out of a technical recession. Spain's economy grew by an above-forecast 0.7% in the same three months and the euro zone as a whole also beat expectations with 0.4% growth. The news came as something of a surprise to the market and the euro made gains, particularly against the US dollar; it strengthened 0.3% against the greenback on the news.

Chinese data also had an impact on the euro this week. The results were weaker than expected and showed the impact of the trade war with the US. This had had a knock on effect for Europe’s economy; stocks for basic resources have a heavy exposure to China and fell when the results were released. European markets finished lower after the Bank of England decided to keep rates steady overnight. The ECB may be looking at the global picture when they make their plans and with so much uncertainty, they may be looking for more successive positive results from Europe before considering a change to their approach. 

USD

The numbers from the US present a conflicting picture and the response of the dollar appears not to be tied closely to the results. For example, last week, strong durable goods orders data failed to prevent a dollar decline. It may be because there is no single narrative; faster-than-expected growth in the first quarter of 3.2% represented quarter-on-quarter growth for 0.8% was cancelled out by higher inventories and weaker consumption. 

Perhaps this mixed picture accounts for why the US Federal Reserve took no heed of the president’s calls for a 1% interest rate cut and held rates in the 2.25% - 2.5% range. While this may have disappointed the Commander-in-Chief, the US dollar made gains against sterling and the euro in the wake of the decision. However, this was a brief response which settled after further reflection on the full implications both of their actions and the picture presented. The testimony of US Attorney General William Barr was also causing ripples in the market, with heated words on both sides of the political spectrum suggesting that there may be further revelations to come. While the US dollar does not seem particularly tied to controversies in the White House, the matter of the Russia investigation continues to cast a cloud over the US and, by extension, the dollar. 

CAD

The Canadian dollar was one of the beneficiaries of the Fed’s decision to keep US interest rates as they were. The Loonie made gains against the weaker US dollar, and there were other reasons to be cheerful this week. Oil prices increased and the Bank of Canada’s Governor Stephen Poloz hinted at the possibility of a better second half of the year. 

While the news was welcomed, the bigger picture suggests there is still some way for the Canadian dollar to go. The currency lost ground for the third consecutive month in April and will need greater momentum to put this in check. Declining numbers are putting pressure on the Loonie but as the substance behind Poloz’ newly found optimism is revealed, there may be a chance for the Canadian dollar to recover some of those losses. 

AUD

The Australian dollar has been having a similarly tough time; the US-China trade war has had a significant impact and so news of an easing of tensions was welcomed, with some forecasting that the currency has the potential to make gains if an agreement is reached. Like the Canadian dollar, there is certainly room for growth and the numbers suggest that if there are developments in global trade then the picture may look much brighter for the Australian economy – and by extension, the Aussie dollar. However, that may be cold comfort for investors at the moment after the Aussie sank to 69.88 cents against the US dollar last week, the lowest since early 2016. By Thursday, the rate had increased back to 70.2 cents but the levels suggest that the Aussie dollar will be sensitive to any negative economic data. 

Analysts are predicting that the Reserve Bank of Australia will cut interest rates either in May or in June due to poor consumer inflation and wage growth and a rapid decline in house prices. There is also political uncertainty with elections taking place in May, which may mean that the RBA choose to wait until the dust has settled on the elections before making a move. Either way, political uncertainty is likely to unsettle the currency, particularly with several unanswered questions elsewhere regarding the US-China trade war. 

NZD

New Zealand’s trade figures for March showed that exports increased by 21% while imports remained steady, creating a surplus that was seven times larger than expected. Despite this, when ANZ published its Business Outlook, the headline described the situation as "Stable", and the report showed that "a net 38% of respondents [reported] that they expect general business conditions to deteriorate in the year ahead". All the gains from the positive news of the trade surplus evaporated on the news, and the Kiwi continued to struggle after disappointing employment figures; unemployment moved downward to 4.2% but there was a 0.2% fall in the number of people in work. In addition, wage growth was disappointing, coming in at 2.0% instead of the forecast 2.1%.

It’s clear that the Kiwi will be looking for better news that the announcement of Prime Minister’s engagement to make an improvement, and may remain in the doldrums unless opportunities arise to make gains elsewhere, or positive figures can be found to boost optimism and business confidence. 

GBP: Positive gains after Brexit news but BoE urges caution

GBP: Positive gains after Brexit news but BoE urges caution

EUR: Surprise good news boosts euro but trade war weighs on economy

EUR: Surprise good news boosts euro but trade war weighs on economy

USD: A mixed economic picture and no change on rates from the Fed

USD: A mixed economic picture and no change on rates from the Fed

CAD: Optimism from the BoC sees the Loonie make gains

CAD: Optimism from the BoC sees the Loonie make gains

AUD: Tough times for the Aussie with an election on the horizon

AUD: Tough times for the Aussie with an election on the horizon

NZD: Trade surplus can’t balance out disappointing employment numbers

NZD: Trade surplus can’t balance out disappointing employment numbers

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