Global equities found their footing last week and the Dollar inched higher but ultimately remains range-bound.
There was little relief for the Euro, which is near a 2-month low despite a small recovery late in the week, while Sterling was under modest pressure following disappointing UK macro data and the ongoing Brexit saga. The Swiss Franc, which has traded in the widest range of any developed currency in the past six months, finished the week at its lowest point since 9th October.
The Australian Dollar held its ground but it was the Kiwi Dollar which put in the performance of the week, gaining a further 1.2%.
US Dollar
US Treasury yields were somewhat more stable last week and the Dollar was able to build on still strong US macro data to appreciate about 0.5% on the week. But the Dollar still lacks any clear direction. Dollar bulls point to strong US economic growth, both in relative and absolute terms, and the Fed’s willingness to continue hiking rates. Dollar bears, however, argue that other central banks are also increasing their policy rates, the risk to US growth in coming months are to the downside and President Trump’s attacks on the Fed undermine its independence. It is increasingly unclear who will eventually win this tug of war.
Euro
The Euro rebounded on Thursday and Friday but is still hovering near a 2-month low in trade-weighted terms. The finger of blame is being pointed at the Italian government’s draft 2019 budget which has irked the European Commission for effectively being too loose. However, as European crises go, this is pretty tame stuff and the causes behind the Euro’s ongoing weakening may well be a broader and more complex. Modest Eurozone growth and inflation is clearly muting the Euro’s attractiveness and the ongoing Brexit saga may well be starting to feed through the single currency, even if the UK (and Sterling) arguably have the most to lose.
Sterling
Sterling weakened 0.5% last week, with a decent rise in real weekly earnings in August the only bright spot. The fall in headline CPI-inflation from 2.7% yoy in August to 2.4% yoy in September – the bottom of an 18-month range – suggests that a Bank of England policy rate hike is now very unlikely before end-year. The contraction in retail sales in September added to the gloom and markets do not expect the BoE to hike rates before next September.
However, as often the case in recent weeks, it was Brexit which stole the headlines. The UK and EU failed to reach an agreement on a Brexit deal ahead of the European Council meeting on 17th October and Prime Minister May seems unable and/or unwilling to put forward a deal which is both acceptable to the EU and to her own constituents (cabinet, parliament, electorate). Unless the leader of the ruling Conservative Party can somehow pull a rabbit out of the hat in coming weeks she could be under growing pressure to resign and cave in to demands for a second referendum.
Swiss Franc
The Swiss Franc, which this summer had been boosted by capital outflows from emerging markets, continues to drift lower last week. The Swiss economy is doing reasonably well, even if there are signs that GDP growth slowed slightly in Q3, with tourism flows robust. But with global risk appetite having found its footing for now at least, the Swiss Franc is lagging some of its peers. The Swiss National Bank is unlikely to push back given that a slightly weaker (and more competitive) Swiss Franc is likely to help the very open Swiss economy.
Australian and Kiwi Dollars
The Kiwi Dollar was the best performing developed currency last week, gaining over 1%. The catalyst was a larger-than-expected rise in CPI-inflation in Q3 of 0.9% qoq (the highest since Q1 2017) which suggests that New Zealand’s economy is perhaps finding its feet after a challenging year. The RBNZ will not be in a rush to hike rates any time soon but at the very least may refrain from sounding quite as dovish as it did this summer.
