Global risk appetite continued to recover last week, with high-yielding emerging market currencies outside of Asia posting strong gains and global equities continuing to grind stronger. This put further modest pressure on the Dollar while Sterling also lost ground. The Euro and Swiss Franc made small gains but the Australian and Kiwi Dollars were the outperformers, each appreciating about 1.5% in trade-weighted terms
US Dollar
The Dollar edged to a 3-week low last week in trade-weighted terms and has been flat in the past 48 hours. While US macro data continue to point to strong GDP growth in Q3 and a likely 25bp rate hike at this week’s Federal Reserve policy meeting, the medium-term outlook for the US is arguably cloudier. Real money investors which have been long the Dollar are seemingly reluctant to add to their positions while “fast money” appears to have rotated into higher-yielding emerging market currencies.
Euro
It was a rather quiet for the Euro which managed to eke out a 0.4% gain. Eurozone PMI data suggest that GDP growth did not recover much if at all in Q3 and Brexit is still a bone of contention, but with European political risks receding and the German economy looking healthy there is still seemingly support for the common currency.
Sterling
Sterling had edged higher throughout most of the week on expectations that the UK and EU were at least willing to move forward on Brexit negotiations. But Sterling rolled over on Friday when it became clear that the EU will not sign off on Prime Minister May’s post-Brexit deal, with French President Emmanuel Macron particularly critical of the UK’s proposed plan.
Prime Minister May was in combative mood on Friday, saying that she would stick to her proposed plan while a number of cabinet members dismissed the idea of early general elections or a second referendum. But she is in a tough position with time running out and the Labour Party has upped the ante yesterday by saying that while it favoured early elections in the event of the UK and EU failing to reach agreement, it would keep all options on the table including a second referendum. The ruling Conservative Party, which holds its annual conference on 30th September to 3rd October, will be under pressure to show that it can get a good deal with the EU or succumb to rising and political pressure to hold a second referendum. The GBP/USD cross is back up above 1.31 this morning but it’s likely to be a rocky road for Sterling in coming months.
Australia and Kiwi Dollars
The AUD/USD and NZD/USD crosses were both up about 2% last week, resulting in trade-weighted gains of about 1.5% for both currencies. Strong macro data, including Q2 GDP in New Zealand, contributed to these respectable performances. The fact that US and Chinese import tariffs were not as large as originally feared also boosted the Australian Dollar given the Australian economy’s close linkages with China.
