The Dollar lost ground last week to the benefit of the Euro but Sterling remains largely lifeless. The Australian and New Zealand Dollar made modest gains as concerns about the path of the Chinese Renminbi appear to have faded for now. But global equity markets remain choppy, partly due to the lingering uncertainty about US-centric protectionist policies and their possible domestic and global impact.
US Dollar
The Dollar TWI shed over 1% last week and has weakened further in the past 24 hours and is now at its weakest since 12th June. This Dollar correction, which admittedly is still very modest after months of appreciation, has come about despite robust employment data and strong evidence that US GDP growth recovered briskly in Q2. There are a number of possible reasons, including growing concerns that US President Trump’s protectionist measures may net-net end up hurting the US economy and the very industries he is trying to protect. Moreover, markets are seemingly still very ambivalent as to whether the Federal Reserve will have the appetite to hike rates twice more before year-end.
Euro
The Euro TWI remained at the top end of its year-to-date trading range, supported by reports that some ECB board members favour a slightly faster rate-hiking cycle than the one outlined in the June policy meeting and a resolution, even if imperfect, to the crisis which has rocked the German political system and Chancellor Merkel’s leadership. Eurozone data also point to a recovery, even if modest, in economic growth in Q2
Sterling
Neither decent UK macro data, a hawkish speech by BoE Governor Carney in which he talked up the prospects of a summer hike nor Friday’s cabinet meeting at which Prime Minister outlined what a post-Brexit deal may look like it had any material impact on a broadly unchanged Sterling TWI last week. Even Team England’s remarkable progression to the semi-finals of the Football Word Cup failed to really stir the currency. Sterling was stronger in overnight Asian trading and this morning but ultimately the TWI remains within a narrow range in place since late-April
Markets were indeed largely unmoved by the cabinet’s outline of a possible customs union arrangement between the UK and EU once the UK has left the EU in March 2019 and the transition agreement expires in December 2020. Secretary of State David Davis resigned over the weekend in the wake of the cabinet meeting, in disagreement with Theresa May’s softer approach to Brexit but again currency markets have not reacted much. While his departure may have removed a Hard Brexiteer from a divided cabinet, it is unclear who will replace him and more fundamentally it remains to be seen whether the EU will accept the British government’s proposals.
Australian and New Zealand Dollar
The Australian and New Zealand Dollar made small gains late last week, seemingly helped by signs that the Chinese central bank is keen not to see the Renminbi weaken too much, too fast. But these two currencies remain within monthly ranges, with central banks in neither country seemingly ready or willing to play up the possibility of a rate hike any time soon.
