US President Trump was again at the epicentre of news headlines and in the process generated a degree of volatility for currencies, including the Dollar. Following his visit to the UK on 13-17 July, during which he blew hot and cold about British Prime Minister May, he performed a remarkable u-turn on 18th July, admitting he had been mistaken in saying (only a few hours earlier) that he saw no reason to think that Russia had meddled in the 2016 US elections. Even by President Trump’s standards this was an incredible development, likely under pressure from senior Republicans.
President Trump stepped up a gear on Friday. He repeatedly criticised the Federal Reserve’s interest rate hikes and accused China and the Eurozone of manipulating their currencies, arguing that this left the Dollar and the US at a disadvantage. He ended the week saying he would be willing to impose tariffs on the totality of US imports from China, worth about $500bn per annum. Chinese policy-makers show no sign of buckling, instead implicitly retaliating by devaluing the Renminbi.
The British government published last Monday its much-awaited blueprint for Brexit but if anything it has further divided the cabinet and House of Commons where the ruling Conservative Party is short of a parliamentary majority. Markets also took little solace from the government’s detailed White Paper and had to deal with soft inflation and retail sales data for June. Sterling, which had been in a multi-month range, finally buckled.
The Euro had a strong week, appreciating a further 0.5% to a new multi-year high. With the Dollar being buffeted by President Trump and Sterling under pressure, markets seem to have turned to the Euro (and Yen).
US Dollar
The Dollar was choppy within a still narrow range last week and is today broadly unchanged from Friday. US macro data point to very strong GDP growth in Q2 and July surveys for manufacturing output also suggest that growth remained robust in the first half of July. This has underpinned the market’s pricing of a further 40bp of Fed rate hikes before year-end.
But this has not translated into a stronger Dollar, with the Trade Weighted Index in the middle of a narrow 1.8% range in place since mid-June. While US GDP growth has clearly outstripped growth in other developed economies in recent months, the concern is that this US-centric trade war will start denting US trade, investment and employment. Moreover, markets have found it hard to ignore President Trump’s verbal attack on the Dollar even if the Federal Reserve’s independence is not in doubt.
Euro
The Euro’s appreciation has been slow and steady, with the common currency up another 0.5% last week to a new multi-year in trade-weighted terms. EUR/USD has risen to the strong end of a narrow three-week range. There were few major data points for markets to focus on last week and European policy-makers reiterated their warning about the negative impact of US tariffs on European and global trade and growth. But with Eurozone political concerns having died down for now and the ECB still on course to start tapering its QE program in October, markets seem to currently view the Euro as one of the more reliable major currencies.
Sterling
Sterling had a tough week, shedding over 1% with GBP/EUR down to 1.12 from 1.13. Markets were left unimpressed by the government’s White Paper on Brexit which has been attacked by both Brexiteers and Remainers and was given only a lukewarm reception by EU policy-makers. Prime Minister Theresa May has only 3-4 months left to come up with a final post-Brexit package which is acceptable to her still divided cabinet, parliament and EU negotiators – a tight timeframe at best. Soft UK macro data poured further cold water on the odds of the Bank of England hiking rates next week and in the process on Sterling. Core CPI-inflation slowed in June and retail sales contracted after a decent rebound in April-May and markets are now only pricing in 16bp of hikes at the policy meeting on 2nd August.
Australian and New Zealand Dollar
The Australian Dollar had a largely uneventful week while the Kiwi Dollar gained a decent 0.7% following the release (on 17 July) of the Reserve Bank of New Zealand’s measure of core CPI-inflation of 1.7% yoy in Q2, the highest reading in seven years. While markets don’t expect the RNBZ to hike rates this year, stronger inflationary pressures have at least given credibility to the idea that New Zealand’s central bank could hike rates next year.
