The Dollar, Sterling and Australian Dollar all weakened about 0.5% in trade-weighted terms last week while the Swiss Franc and Kiwi Dollar were broadly unchanged. Conversely, the Euro was one of the stand-out performers among major currencies, gaining about 1.5%. The meeting between US and Chinese representatives on 22-23 August to resolve disputes over trade and import tariffs ended without an agreement and, as planned, both sides introduced on 23rd August reciprocal tariffs of 25% on imports worth $32bn in aggregate.
US Dollar
The Dollar weakened about 0.5% last week but has been broadly stable since Friday. While US macro data remain robust and the Federal is still on course to hike rates at its September and potentially December meeting, Dollar bulls were seemingly disappointed by Chairperson Powell’s balanced comments at the Jackson Hole Economic Symposium on Friday. He clearly left the door open to two more 25bp rate hikes this year but emphasised that macro data would continue to guide gradual Federal Reserve rate hikes as well as risks to growth from the US-Chinese trade war.
Euro
The Euro was the second best performing major currency last week (behind the South African Rand), appreciating about 1.5% in trade weighted terms. The Euro’s appreciation was broad-based, with the EUR/USD cross up over 2% and the Euro up against all major currencies bar the Rand and a handful of central European currencies.
It was seemingly a case of investors looking for reasonably priced currencies backed by the prospect of tighter central bank monetary policy and decent macro fundamentals. At the same time markets appear to be ignoring for now threats from the Italian government to withhold contributions to the EU budget of €14bn per annum if EU member states did not accept the 177 immigrants which the Italian navy recently rescued.
The European Central Bank’s minutes of its August meeting revealed little new of note but did re-confirm that the ECB planned to start tapering its QE program as of October.
The (preliminary estimate) of the Eurozone Composite PMI, a leading indicator for the manufacturing and services sector which closely tracks Eurozone GDP growth, was broadly unchanged in August at 54.4 after having dropped from 54.9 in June and a multi-year high of 58.8 in February. This provided some welcome relief after Eurozone GDP growth slowed to 2.2% yoy in Q2 from 2.5% yoy in Q1. The rise in the German IFO business climate index to a higher-than-expected 103.8 in August from 101.7 in July, based on data released today, is further evidence that economic growth in the Eurozone and its largest economy may have stabilised or even improved slightly in early Q3.
Finally, reports on 21st August suggesting that Commerce Secretary Wilbur Ross had likely pushed back his timetable for the publication of his recommendations regarding tariffs on auto imports, including from the EU, likely eased concerns for large European car manufacturers and by extension the Euro currency market.
Sterling
Sterling lost a bit of ground last week with markets unimpressed by the first batch of 24 “technical notices” which the British government released in order to prepare the government, businesses and households in the event of the UK leaving the EU on 29th March without a deal in place. These notices were indeed technical in nature and heavy-going for all but the most assiduous reader and the more controversial notices – expected to be released last – could put Sterling under further pressure.
Australian Dollar
The Australian Dollar was choppy last week, buffeted by political turmoil. The appointment of Australia’s seventh prime minister in 11 years initially rattled markets but the Dollar quickly recovered to end the week down only 0.5%. The Aussie Dollar has been broadly stable today and markets are likely to quickly refocus on domestic macro data and the evolution of the Chinese economy and their possible impact on so-far conservative Reserve Bank of Australia monetary policy.
