The main theme in FX markets last week was again the Dollar’s broad-based appreciation. Asian currencies also managed modest gains, helped on Friday by the seemingly successful summit between the North and South Korean leaders and an easing of regional geopolitical tensions. In contrast, the Euro, Swiss Franc and Antipodean currencies lost further ground while Sterling’s slide extended and accelerated following the release of dismal Q1 GDP data.
US Dollar
The US Dollar trade-weighted-index (TWI) was up about 1% last week to a 14-week-high. The Dollar’s steady rise has gone hand in hand with a sustained uptrend in US government bond yields, with 10-year yields breaking through the important psychological level of 3%. But in the past couple of years higher US yields alone have been insufficient to support the Dollar, with other major currencies – including the Euro – benefiting from improved macro stories.
It is seemingly the combination of higher US yields, robust US economic growth, rising inflation and the Federal Reserve’s relative hawkishness which is currently driving the Dollar stronger. The Federal Reserve indeed remains far more hawkish than central banks in Europe, Canada, Australia and pretty much every other developed and emerging market economy. US GDP growth slowed slightly in Q1 to 2.3% quarter-on-quarter annualised in Q1 but year-on-year growth of 2.9% means US growth is outstripping growth in the Eurozone and in particular the UK and is catching up with rising global GDP growth of around 3.7%.
Sterling
Weak monthly macro data and a dovish speech by Bank of England Governor Carney on Friday 20th April have depressed Sterling in recent weeks. But the coup de grace was the release of the first estimate of UK GDP in Q1 on Friday which sent Sterling to a five-week low. Growth slowed to a 6-year low of just 0.1% qoq, below even the more pessimistic forecasts and down from an already timid 0.4% qoq in Q4 2017. In year-on-year terms, growth slowed to 1.2% which puts the UK firmly at the bottom of the G7 growth table.
Cold weather and the 3.3% qoq slump in construction were only partly to blame, with growth in services and manufacturing a disappointing 0.3% and 0. 2%, respectively. While these data could be revised in the second and third estimates, underlying growth is clearly weak. Real wages are flat-lining, Brexit uncertainty is holding back fixed investment and net trade has not benefited materially from a weaker Sterling. A rate hike at the Bank of England’s policy meeting on 10th May now looks unlikely, with markets pricing in only a 10% probability of a 25bp hike (versus 80% only a few weeks ago).
Euro
Once again the Euro was only down marginally last week despite mounting evidence that Eurozone growth likely slowed in Q1 and that the European Central Bank, which met on Thursday, is clearly in no rush to start discussing the possibility of tighter monetary policy. The Euro TWI remains firmly within a narrow 2% range in place since mid-January and it is unclear at this stage what will trigger a move outside this range.
GDP growth in France, the Eurozone’s second largest economy after Germany, slowed to 0.3% qoq in Q1 from 0.7% qoq in Q4 2017 while the German IFO business climate index fell further in April to 102.1. The Eurozone macro picture has lost its silver-lining, with the Euro’s appreciation since 2017 and concerns about a possible global trade war are seemingly weighing on confidence. The next big level in EUR/USD is 1.20 which was last breached in early January 2018.
Swiss Franc
The Swiss Franc has been on a downturn since early February and weakened further last week to a new post-revaluation low. Historically it has been regarded, along with the Japanese Yen, as a safe-haven currency which tends to outperform during periods of uncertainty or “risk-off”. But this inverse correlation between the Swiss Franc and measures of global risk appetite, including the S&P 500 and equity volatility, seems to have broken down for now. Indeed very loose Swiss monetary policy is seemingly the driving force behind Franc depreciation, even when global equities are having a bad day or week.
Antipodean Currencies
The Australian and Kiwi Dollars weakened further last week. The Australian Dollar TWI, which was down about 0.4%, is failing to capitalise on strong international commodity prices. Signs that the Reserve Bank of Australia will not hike rates any time soon in the face of at-best mixed macro data, including broadly stable consumer price inflation, are seemingly dragging the Australian Dollar lower.
