The Dollar weakened slightly last week but it was Sterling which was in markets’ sights, depreciating 1.7% on Brexit-related concerns. An under-pressure Euro managed to push 0.3% higher while the Australian and Kiwi Dollars both rose more than 1%. The Swiss Franc was broadly unchanged in trade-weighted terms.
Dollar
The Dollar was down about 0.4% last week in trade-weighted terms and remained more volatile than it had been a few months ago. Ultimately, however, the Dollar is still broadly in the middle of a 1.3%-wide range in place since late-October. FOMC members, which a month ago were almost unanimously bullish/hawkish, toned down their hawkish rhetoric in view of slowing global growth and concerns about world trade and Brexit. Chairperson Powell and FOMC members Clarida, Kaplan, Evans and Harker were all, to varying degrees, less confident that the Fed could or should continue hiking rates at its current sustained pace.
While it is likely too late for the Fed to completely reverse track and keep rates unchanged at its December policy meeting, markets are now pricing in only 37bp of rate hikes next year, compared to 60bp in early October. This translates into markets expecting one 25bp hike and a 50% probability of a second hike, whereas in its September dot-chart FOMC members had pencilled in three full hikes as being appropriate in 2019. It is therefore conceivable that the FOMC dot-chart published in December will see a less aggressive rate-hiking path pencilled in for next year.
Euro
The Euro found its feet last week and is now broadly in the middle of a six-week range. Weak Eurozone economic growth and the pressing issues of Brexit and the Italian budget situation are acting as headwinds for the Euro. At the same time, however, the ECB has maintained an even rhetoric, with no suggestion that it is even considering changing its plans to end QE by end-year.
Sterling
A fortnight ago Sterling was on the ascendancy with growing hope that the UK and EU were inching closer towards a draft Brexit deal. These hopes materialised, with the British government announcing on Tuesday that both sides had agreed to a draft Withdrawal Agreement and to a broad outline of the UK’s future relationship with the EU. The divided cabinet on Wednesday reluctantly signed off on this Brexit deal but the party was short-lived. The resignation of Brexit Secretary Dominic Raab on Thursday and other ministers and private secretaries highlighted the broad-based political opposition to this draft deal and reignited concerns that Prime Minister May will struggle to get it through parliament in a vote tentatively pencilled in for mid-December.
Sterling promptly collapsed although it has been broadly stable in the past three sessions as markets figure out what’s next. There has been much speculation that Prime Minister could be toppled in a Conservative Party leadership bid but so far party rebels have failed to gather the numbers required to trigger a leadership bid and there are few (if any) candidates acceptable to both Remainers and Leavers. Moreover, Theresa May and the EU have made clear that there is no alternative to the draft deal currently on the table, raising concerns (once again) that the UK could leave the EU in March without a deal in place.
Australian and Kiwi Dollars
The Kiwi Dollar was again the star performer last week, appreciating 1.3% to a seven-month high on Friday, although it has since weakened 0.4% seemingly on the back of some profit-taking. Once again, the currency was driven by better domestic macro data and the fading the risk that the Reserve Bank of New Zealand may be forced to go against the global trend and cut its policy rate.
