Much of the focus last week was on emerging market currencies and particularly the lingering pressure on the Argentine Peso and Turkish Lira. Sterling, buffeted by Brexit-related headlines, ended the week up 1% but has over the weekend given back half of these gains. The Dollar was marginally stronger last week while the Swiss Franc and Euro further extended their gains. Conversely, the Kiwi and in particular Australian Dollar lost ground.
US Dollar
The Dollar was up about 0.2% in trade-weighted terms last week and has inched a little higher since the weekend. The US and Mexico signed a new NAFTA deal which on the whole seems to favour the US (at least compared to the old deal) but there has been no progress in negotiations with China over tariffs and trade. US data for July point to an ongoing slow increase in underlying inflation and markets will be weighing US macro data in coming weeks ahead of the Federal’s 26th September policy meeting.
Euro
The Euro sold off on Friday following the release of weaker-than-expected (preliminary) Eurozone CPI-inflation data for August showing a modest year-on-year fall in both headline and core measures. But the ECB is still likely on course to start reducing its QE bond purchases as of October and the Euro ended the week up by about 1%, building on its 0.8% appreciation the previous week. Strong German business climate index numbers for August gave the Euro an early boost and markets seemingly ignored anti-EU rhetoric by the Italian government and opposition Social Democratic Party in Sweden.
Sterling
It was a choppy week for Sterling which rallied hard after EU chief negotiator Barnier suggested that a post-Brexit agreement between the EU and UK would likely be a bespoke deal and that some progress had been made in certain areas. However, the EU’s underlying message remains unchanged, namely that it will not allow the UK to cherry-pick the terms and conditions of such a deal, that there were still fundamental disagreements and that the issue of the Northern Irish border had yet to be resolved.
British Prime Minister Theresa May stuck to her guns that she would not water down the deal she had tabled a month ago but the reality is that compromises will have to be found if both sides are to reach a deal in the next two months. Moreover, UK economic growth remains rather soft, with the UK manufacturing PMI down to 52.8 in August from 53.8 in July and contributing to Sterling’ 0.5% fall since Friday.
Swiss Franc
The Swiss Franc appreciated almost 1.5% last week, building on a small gain in the previous week. With concerns about high-risk emerging market currencies refusing to fade and Sterling prey to Brexit negotiations, safe-haven currencies such as the Swiss Franc are seeing decent FX inflows, despite macro data pointing to still modest Swiss economic activity in recent months. Swiss retail sales contracted 0.3% yoy in July, following a small 0.2% yoy increase in June, according to data released this morning.
