The main theme last week was again rising geopolitical tensions spurred by the United States introducing tariffs on $60bn of Chinese imports and fears of retaliation and globalised trade wars. Volatility in currency markets remains lows but rose further in equity markets with the VIX volatility index at its highest since early March.
US Dollar
The Dollar ended the week broadly where it had started, with a short-lived rally before the Federal Reserve’s policy meeting on 21 March – the first since Chairperson Jerome Powell took over from Janet Yellen. The Fed hiked interest rates 25bp to 1.50-1.75%, as widely expected and more importantly markets overall had interpreted, the accompanying statement also confirmed the forecast update to the downside.
Analysts’ interpretation was that Fed members did not up their expectations for 2018 from three to four rates hikes but did increase their expected rate hikes in 2019 from two to three. But this conclusion may be over-simplistic as the 15 members were evenly split between three and four hikes according to the updated “dot-chart”. So while US government bond yields may fall further near-term as significant short-US rates positions are cut back, this may not signal the beginning of a medium-term trend of lower US yields.
US President Trump announced on 22nd March import tariffs on about $60bn of Chinese imports in retaliation for the alleged theft of US intellectual property and unfair trading practices. While this was perhaps less aggressive than initially feared, China has reportedly prepared a list of tariffs on about 128 US products which account for about $3bn of annual Chinese imports. The US has yet to finalise its plans for broader tariffs on imports of steel and aluminium but has suggested that the EU and NAFTA partners (Canada and Mexico) would be excluded.
Sterling
Sterling extended its metronomic appreciation last week and is back to its post-EU referendum high against the currencies of the UK’s main trading partners. The main catalyst was the Bank of England’s policy meeting on 22nd March at which Governor Carney gave the clearest indication yet that the BoE may hike rates 25bp in May and two out of ten MPC members voted for a 25bp rate hike. The BoE is seemingly giving more weight to the recovery in wage growth and a 1.5% pick-up in retail sales volume in February than to falling headline and core CPI-inflation. Another positive for Sterling was the European Council’s approval on Friday of the UK’s transitional deal once it leaves the European Union in March 2019. While this was largely a formality, it clears the way for more detailed negotiations between the UK and European Union over coming weeks and months.
Euro
The Euro rallied about 0.7% last week despite some slightly disappointing German business climate and economic sentiment data for March and the fall in the flash Eurozone PMI Composite Output Index to a 14-month low of 55.3. The main catalyst for the Euro’s up-tick back to its recent multi-year highs was seemingly reports that the US may exclude the European Union from tariffs on imports of steel and aluminium.
Antipodeans
The Australian and Kiwi Dollars had diverging fortunes last week. The Australian Dollar weakened to lows not seen since mid-2016 on growing concerns that US tariffs on imports will directly impact Australian commodity exports and indirectly if Chinese trade slows. Conversely, the Kiwi Dollar recouped some of the losses it has suffered the previous weeks, with markets seemingly comforted by the fact that the Reserve Bank of New Zealand’s statement, following its policy meeting, contained no reference to (an over-valued) Kiwi Dollar.
