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Weekly Brief - 30th November 2018

EUR weekly currency update

It was not a bad week for the euro but there was little cause for celebration. It took half a cent off sterling and lost a quarter of a US cent. Investors continued to be rattled by Italy's apparent intransigence about the 2.4% budget deficit planned for 2019, even though finance minister Giovanni Tria acknowledged that he must take account of "the fears of our European partners" and financial markets.

The euro zone economic data were mostly disappointing. Last Friday's provisional purchasing managers' index readings were all below forecast and lower on the month. Germany's economy was shown to have shrunk by 0.2% in the third quarter (as did those of Switzerland and Sweden). German business confidence softened in November. The only positive signal came with German unemployment, which ticked down to 5.0%. In the coming week the statistical highlight from Euroland will be today's inflation figures and the PMI readings on Monday and Wednesday.

USD weekly currency update

The dollar was on average unchanged against the other major currencies. It took a quarter of a cent off the euro and nearly a full cent from sterling. It was not a one-way street though. At lunchtime on Wednesday the dollar was a cent and a quarter ahead against the euro. Then the chairman of the Federal Reserve made a speech to the Economic Club of New York and the dollar went into reverse. As ever, the wording of Jay Powell's message was subtle. He said that US interest rates are "just below" a level that would be neutral for inflation. A month ago he said they were "a long way from neutral". The implication was that the Fed is contemplating no more than one or two more rate increases before it halts its tightening strategy.

Economic data from the States added credibility to that idea. They were not particularly great. House prices, wholesale inventories, personal consumption expenditure, new home sales and pending home sales all came in below forecast.  

CAD weekly currency update

For no particular reason the Canadian dollar was unchanged against the pound. It lost half a US cent. Where sterling's problem was the tortuous - and torturous - progress of Theresa May's Brexit bill towards a vote in the Commons on 11 December, the Loonie's was a combination of soft oil prices and the  possible escalation of Trump's trade war with all and sundry. The story there is that, "for national security reasons", he is considering a punitive import tax an all imported cars. The bigger the disincentives to international trade, the harder it is for Canada to do business with its biggest customer, the United States.

The Canadian economic data, all of which came out in a rush last Friday, were reasonably helpful to the Loonie. Retail sales went up by 0.2% in September, twice as much as expected, and inflation accelerated from 2.2% to 2.4% in the year to October. 

AUD weekly currency update

The Australian dollar was the top performer among the major currencies, strengthening by an average of 0.9%. It added two thirds of a US cent and went up by almost three cents against sterling. Economic data from Australia were few and far between. Construction work completed was down by 2.8% in the third quarter, a far cry from the expected 1.0% increase. Private capital expenditure - business investment - also fell by 0.5%, having been forecast to increase by 1.0%. To complete the triangle of disappointment, new home sales fell 0.8% in October. But after ten months of decline against the US dollar, investors apparently decided at the beginning of November that it had gone far enough. 

No such benefit of the doubt was given to sterling. Investors tend to believe that Theresa May's Brexit bill will not win Commons approval when it goes to a vote on 11 December.  And they have no idea what will happen after that.

NZD weekly currency update

The NZ dollar, like its Australian cousin, has been enjoying a partial reversal of its losses earlier this year to the US dollar. Having come close to a three-year low at the beginning of October it has rebounded by 6.5% against the Greenback. Some 0.7 percentage points of that recovery came in the last week, as the Kiwi strengthened by two and a half cents against sterling. Among the major currencies it took second place for the week behind the Australian dollar. The rally owed nothing to the NZ economic data. A quarterly increase of 0.4% in retail sales for Q3 looked pale at the side of the 1.3% rise seen in the second quarter. The trade deficit widened in October too, as imports increased more quickly than exports.

But there was nothing the Kiwi could do to make itself less attractive than sterling. Investors expect Theresa May's hard-won Brexit deal to fall at the first fence when it is put to a vote in the Commons on 11 December. And as for what happens after that, they don't have a clue.

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