Global risk appetite was buoyant last week with global equities having now risen in 9 of the past 10 trading sessions and the S&P 500 closing at a new record-high of 3,221 on Friday. US treasury secretary Mnuchin announced late last week that a Phase One trade deal with China had been agreed on and would be signed in the New Year. While there are still US and Chinese import tariffs in place, this chapter in this lengthy saga is finally coming to an end.
This benefited the Australian Dollar, which rallied 0.5% to a 7-week high. Strong Australian employment data also seemingly helped the currency, with total employment rising nearly 40,000 in November. The Kiwi Dollar was also up, albeit by only 0.2% in trade-weighted terms, and is currently trading at its strongest level since end-July. However, the safe-haven Swiss Franc was also up 0.5% last week in trade-weighted terms and is currently trading within striking distance of a 12-week high.
Furthermore, Sterling – which had rallied strongly in the wake of the UK general election on 12th December and the ruling Conservative Party regaining its parliamentary majority – continued to weaken last week. GBP/USD, which had traded as high as 1.35 late on 12th December, is currently hovering above 1.30 – 0.5% below its pre-election level.
Mixed UK macro data for October-November did Sterling few favours. Employment figures for October were strong and CPI-inflation was broadly unchanged in November but retail sales contracted 0.6% mom in November, the fourth consecutive month of no growth. UK consumer demand and economic growth overall remained weak in the run-up to the December elections.
However, the main catalyst for Sterling’s sharp reversal was Prime Minister Johnson’s announcement early in the week that he would seek for parliament to vote on an amended draft Withdrawal Agreement (WA) which would rule out an extension of the transition period beyond December 2020. Parliament in its second reading voted in favour of the WA. The UK and EU had originally agreed that the transition period, during which both sides would try and agree on a trade deal, could be extended by up to two years. A transition period of less than a year suggests that Johnson is prepared to accept a “hard” Brexit or even see the UK leave the EU without a deal.
Price action in the Dollar and Euro was muted last week, with both currencies stuck in narrow ranges.
