The price action last week was driven on the whole by much weaker global equity markets, with most major currencies largely treading water. The US Dollar and Sterling were flat in trade-weighted terms although Sterling has weakened 0.3% over the past 48 hours on concerns that a Brexit deal is still out of reach. The Euro managed to eke out a 0.2% gain but has given back all of this modest gain in Asia trading. The Swiss Franc continued to weaken and is now down about 2% in the past month. The Australian and Kiwi Dollars both appreciated almost 1% but ultimately remain within well established ranges.
US Dollar
The dam finally broke for US equities, with the S&P 500 down about 6.7% between 3rd and 12th October before staging a mini-revival on Friday (+1.4%). This global equity sell-off and slump in global risk appetite was seemingly triggered by market concerns over the rapid rise in US Treasury yields in recent weeks (and its potentially negative impact on companies’ cost of borrowing) and repeated warnings about the outlook for global economic growth. US President Trump’s vocal criticism of the Federal Reserve’s rate hikes did not help and neither did US data showing that CPI-inflation continued to fall in September. Rising yields in the face of falling inflation – i.e. an increase in real rates – are rarely a positive combination for equities.
However, the across- the-curve 4bp to 8bp fall in US government bond yields was ultimately modest, as was the correction in the Dollar which ended the week (and the month) broadly unchanged. Event risk in Q4 remains elevated and the Dollar’s stability may be tested in coming weeks.
Euro
The Euro capitalised on the Dollar’s wobble with the EUR/USD cross back above 1.1550, however the Euro has weakened again slightly during Asian trading. The issue of Italy’s 2019 budget appears to have fallen into the background but modest Eurozone growth and inflation continue to weigh on the single currency.
Sterling
Sterling had made small gains in the previous week on hopes that UK and EU negotiators were closer to reaching a post Brexit trade deals. But promises failed to materialise into any concrete progress, let alone announcements, and Sterling treaded water last week with both sides stuck on how to deal with the Irish border issue. Pressure on Prime Minister May has intensified, with a number of former cabinet members issuing veiled threats to push her out of power and Sterling is down 0.3% since Friday. UK GDP, trade and industrial output data pointing to a slowdown in UK GDP growth in August and indications that retail in sales were soft in September arguably did not help Sterling’s cause either.
Swiss Franc
The Swiss Franc remained near the bottom of a 2-month range, with markets seemingly in no rush to push the Swiss Franc back to its September highs. The wobble in global risk appetite has not helped the Swiss Franc in recent weeks, with markets potentially weary of Swiss central bank intervention to cap any currency gains.
Australia and Kiwi Dollars
The Australian and Kiwi Dollar fared better, making gains of respectively 0.8% and 0.9% in trade-weighted terms last week. Decent macro data and Chinese policy-makers’ willingness to support domestic growth have offered a glimmer hope that the antipodean economies have turned a corner even if central bank rate hikes remain only a distant prospect.
