The Dollar made it a hat-trick, appreciating for the third consecutive week. The Euro, Swiss Franc and Antipodean currencies were broadly flat but Sterling lost further ground. Emerging market currencies outside of Asia remained under pressure with markets concerned about the impact of higher US rates on EM economies. The Argentinean Peso collapsed and prompted the central bank to jack up its policy rate to 40% and the Turkish Lira depreciated by over 4% versus the Dollar. US equities weakened mid-week but recovered on Friday to end the week broadly unchanged.
US Dollar
The US Dollar trade-weighted-index (TWI) was up about 1.3% last week, despite somewhat mixed data, and has now appreciated about 3% since mid-April. PMI data for April in the manufacturing and non-manufacturing sectors suggest that the pace of economic activity may have cooled slightly in early Q2. Labour market data point to an increasingly tight US labour market, with non-farm employment up 1.6% year-on-year in April and the unemployment rate falling to 3.9% – rarely in the past 70 years has it fallen sub 4%.
However, wage growth remains modest and as a result aggregate payrolls continue to rise at about 5% yoy in nominal terms or only 2.5% yoy in real terms. While these numbers point to decent support for household consumption they are unlikely to generate a rapid acceleration in US inflation and markets still seem confident that the Federal Reserve will have to hike only two more times this year.
Sterling
The Sterling TWI weakened a further 0.7% last week and is now down 3% since mid-April to the low since 12th March. UK macro data in recent weeks have all but sunk any chance of the Bank of England hiking rates at its 10th May policy meeting and PMI data for April suggest that the economic recovery in early Q2 2018, following a dismal first quarter, was likely modest.
The question has now shifted to whether the Bank of England will hike rates at all this year and the issue of Brexit is likely to come back to the fore in coming months. The ruling Conservative government, which made no gains in recent local elections, is still seemingly undecided as to whether the UK should remain in a customs union with the European Union.
Euro
The Euro TWI treaded water last week, trading in the upper-third of a narrow, year-to-date range of only 3%, but EUR/USD is down to the lows for the year around 1.192. Eurozone growth slowed to 2.5% yoy in Q1 from 2.8% yoy in Q4 2017, a growth rate not too dissimilar to the United States’. However, this has been insufficient to generate inflationary pressures, with CPI-inflation down to just 1.2% yoy in April, in contrast to the steady rise in US inflation to 2.4% yoy in March.
There are a number of reasons for weak Eurozone inflation, including only modest wage growth and the (lagged) disinflationary impact of a stronger Euro. In any case the European Central Bank is unlikely to materially change its cautious stance on monetary policy and the Euro may well struggle to appreciate until inflation starts to climb.
Swiss Franc
The Swiss Franc stabilised last week but is still at its post-revaluation low. Very loose Swiss National Bank monetary policy has been at the heart of the Swiss Franc’s depreciation and with CPI-inflation still running below 1% yoy the SNB may be in no rush to hike interest rates or even forcefully intervene in the FX markets to support its currency.
