Weekly Brief

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Weekly Brief - 9th November 2018

EUR weekly currency update

Italy and the EU remain locked in a battle about Rome's proposal to run a 2.4% budget deficit in 2019. Italy's government claims the deficit will narrow over time as the economy grows. Brussels says it won't, and the last week's data show why the EU is concerned. The Italian economy did not expand at all in the third quarter, while purchasing managers' index readings for manufacturing and services both slipped into the contraction zone in September and retail sales fell. On a more positive note, the European Central Bank's Economic Bulletin was quite upbeat; Reuters summarised it as "Euro zone consumption resilient, labour market strong".

It was still not a great week for the euro though. It lost three quarters of a US cent and went down by more than a cent against sterling. The pound was supported by a stream of leaks, stories and rumours about a Brexit deal being put before parliament before the end of the month.

USD weekly currency update

It was a busy week for the dollar, first with the midterm elections and then with the Federal Reserve's monetary policy announcement. There were no surprise from either: Democrats won control of the House of Representatives, Republicans tightened their grip on the Senate and the Fed left interest rates unchanged. Broadly, the dollar weakened into the elections and for a few hours afterwards, before moving higher on Wednesday and Thursday. It gained three quarters of a cent against the euro and lost two fifths of a cent to sterling.

Sterling had a successful week, strengthening by  an average of 0.5%. It was kept aloft by a series of stories about a Brexit deal in the offing. Despite denials from Downing Street and an almost complete absence of evidence, investors chose to believe that the end is nigh for the first tedious leg of the Brexit process.

CAD weekly currency update

To a large extent the Loonie followed the same trajectory as the US dollar;  lower through to Wednesday morning and higher thereafter. It lost a net two fifths of a US cent and weakened by nearly two cents against sterling. The Loonie got off to a shaky start last Friday when the Canadian employment data were totally outclassed by the equivalent US numbers which came out at the same time. Unfortunately, investors did not pay as much attention to Wednesday's Ivey purchasing managers' index which came in at 61.8, a whopping 11 points above forecast.  

Sterling had a comfortable week, strengthening by an average of 0.5% against the other major currencies. The UK economic data were no great shakes - the PMIs for manufacturing and services both fell short of forecast - but the Brexit narrative was positive. Investors latched onto the idea that a Brexit deal will be put to Parliament before the end of the month.

AUD weekly currency update

A reasonable week for the Aussie took it an average of 0.3% higher against the other major currencies.  It was unchanged against the US dollar and lost  half a cent to sterling. Sentiment and risk-appetite were the main drivers.  Nervousness ahead of the US midterm elections took the Aussie lower in the first half of this week and rekindled confidence saw it begin to recover on Wednesday morning. Two Australian purchasing managers' indices, for services and construction, came in disappointingly below already modest expectations. However, the Reserve Bank of Australia's quarterly Statement on Monetary Policy painted quite a rosy picture of falling unemployment and higher wages and prices.

With only a couple of purchasing managers' index readings (both were disappointing) to guide them, investors paid less attention to the hard economic data than they did to the Brexit narrative. A series of leaks and rumours led them to believe that a Brexit deal could be put to Parliament this month. They saw it as A Good Thing for the pound.

NZD weekly currency update

There were two events on the Kiwi's agenda; Wednesday's third quarter jobs numbers and Thursday's Reserve Bank of New Zealand policy announcement. The first was hugely positive for the NZ dollar and the second did it no harm. Unemployment fell from 4.5% to 3.9% in Q3, having been expected to remain unchanged, and the participation rate went up to 71.1%. The Kiwi jumped higher on the news and held onto its gains when the RBNZ said it would leave its Official Cash Rate unchanged at 1.75%, probably until 2020. The NZ dollar strengthened by an average of 1.1% against the other major currencies, adding two thirds of a US cent and going up by a cent and a quarter against sterling.

Except against the Kiwi, the pound had a good week too, rising by an average of 0.5%. It was supported by a string of stories and rumours that the government is close to striking  Brexit deal with itself, which will be put to Parliament before the end of November.

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