Gyrations in emerging market currencies and equity markets, Brexit-related issues and the threat of the US and China further escalating their trade war continued to steal the limelight and drive currency price action. The Dollar and the Swiss Franc made small gains in trade-weighted terms thanks in part to decent domestic macro data but it was the Swedish Krona which outperformed with a 1.5% gain which has extended in the past 24 hours. Sterling and the Euro were broadly unchanged while the Australian and Kiwi Dollars remained under pressure.
US Dollar
The Dollar was up about 0.3% last week in trade-weighted terms, thanks to strong ISM non-manufacturing PMI data for August and a rise in hourly wage growth in July to a 9-year high of 2.9% yoy, in contrast to still modest wage growth in the Eurozone, Australia and in particular the UK. The Dollar’s rally was tempered by some cautious comment by a number of FOMC members but expectations that the Fed will hike rates 25bp later this month are for now providing a firm support for the Dollar.
Euro
The Euro was broadly stable in trade-weighted terms but the EUR/USD cross is near the bottom of a three-week range, partly as a result of soft Eurozone macro data out last week. Eurozone GDP growth in Q2 was revised down to 2.1% yoy from 2.2% yoy and German industrial output and exports contracted in July compared to market expectations of small gains. Moreover, there are lingering concerns about loose fiscal policy in Italy and the threat, whether credible or not, of Italy and Sweden looking to exit the EU.
Sterling
Sterling was broadly stable in trade-weighted terms last week and GBP/USD has treaded water around 1.2950 since Thursday. Markets are on the whole seemingly ignoring Brexit-related headlines, including reports that the EU is ready to give EU chief negotiator Barnier a mandate to close a Brexit deal ahead of an informal EU leaders’ meeting in Austria on 19-20 September. Whether or not the UK and EU can reach a deal in next two months would still not answer the question of whether the British parliament would vote in favour of a deal which has so far received little political or public backing at home.
Swiss Franc
The Swiss Franc’s sustained uptrend in recent weeks was given a further decent boost by the release on Thursday stronger-than-expected GDP data for Q2. Swiss GDP growth slowed to a still respectable 0.7% qoq in Q2 from 1.0% in Q1 but beat the consensus forecast and resulted in a higher-than-expected year-on-year growth rate of 3.4% (versus 2.9% in Q1). Continued robust growth in Switzerland is likely to translate at some point into higher inflation from currently modest levels and to a potentially more hawkish Swiss central bank. Higher rates are arguably the cherry on the cake for a safe-haven currency such as the Swiss Franc.
Australia and Kiwi Dollars
The antipodean Dollars last week each shed about 0.8% last week but the Australian Dollar has rebounded in the past 48 hours. The spectre of Australian and Kiwi policy rates remaining on hold for the foreseeable future, the threat of an economic spillover from the US-Chinese trade war on the economies of New Zealand and in particular Australia and anti-foreigner policies in New Zealand are still weighing on both currencies.
