Geopolitics took centre stage last week with US President Trump announcing that the US would renege on the Iran nuclear deal and re-introduce economic sanctions. Perhaps unsurprisingly crude oil prices surged to $77/barrel, the high since end-November 2014. While the other signatories to the Iran deal have vowed to work with Iran to salvage the 2015 agreement there are concerns that foreign companies will suffer when US sanctions take effect in six months time. More positively, North Korea’s leadership agreed to dismantle its nuclear testing site ahead of President Trump’s meeting with Kim Jong un in Singapore on 12th June.
Emerging market currencies remain in the spotlight, with foreign outflows from equity and bond funds highlighting concerns that a stronger Dollar and higher US rates and oil prices will put pressure on many emerging economies. But for all the noise, price action in FX markets was subdued last week, with most currencies trading within a 1% range against the Dollar.
US Dollar
The US Dollar trade-weighted-index (TWI) was broadly flat last week after having appreciated for three consecutive weeks. History suggests that that when Dollar appreciation hits 3-4% on the month, the Dollar starts to run out of the steam and this may be the case at present with market participants having now liquidated much of their Dollar-shorts. Recent US macro data pointing to a cooling in the pace of economic activity in early Q2 have conceivably made it somewhat less compelling to add to Dollar-longs.
Sterling
Sterling initially weakened sharply following the Bank of England’s decision last Thursday to keep its policy rate unchanged at 0.50%. While this was in line with consensus and market pricing, the BoE’s downward revisions to GDP growth and inflation forecasts seemed to pour cold water on the odds of a rate hike before year-end. However, Governor Carney made it clear in his press conference that he still sees a case for a rate hike in H2 2018 and Sterling subsequently stabilised albeit at a one-month low. In a sense markets are back to square one and will now re-focus on UK macro data to gage whether Carney’s still constructive stance on the British economy is justified.
Euro
Once again the Euro TWI treaded water last week with markets struggling for direction. The Eurozone’s economy has clearly lost momentum and the ECB is in no rush to even signal a slightly more hawkish policy stance and this has kept EUR/USD near 1.19. But weakness in Sterling and emerging market currencies has resulted in a stable Euro in trade-weighted terms. It may take an accumulation of tier-1 data, events or policy announcements to move the needle on the Euro.
Swiss Franc
The Swiss Franc was stable for the second consecutive weeks. While very loose Swiss National Bank monetary policy is likely to cap any Swiss Franc appreciation, from a valuation perspective the Swiss Franc certainly looks far more attractive than a year ago (when it was 15% more expensive). Moreover, market concerns about emerging markets and global risk appetite may be benefitting the Swiss Franc, which like the Japanese Yen has historically been regarded as a safe-haven currency.
