It was a choppy week for major currencies buffeted by rising geopolitical tensions. Volatility in currency markets remained modest but spiked in equity markets with the VIX volatility index jumping to a two-week high.
US Dollar
The Dollar was range-bound in the early part of last week but made small gains on Thursday-Friday as markets focussed on US-centric geopolitical tensions and White House turmoil. The threat of trade wars between the United States and some of the world’s largest economies, including China, Germany and Korea, is rising although President Trump seems willing to spare its NAFTA partners, Mexico and Canada. US President Trump announced further sanctions against Russia and is considering measures against China based on claims of intellectual property theft.
There were further key personnel changes within the White House while the enquiry into possible collusion between Trump’s administration and Russia during the presidential elections stepped up a gear. President Trump, who fired Rex Tillerson on 13th March, appointed the following day Larry Kudlow as his new Economic Advisor following the recent resignation of Gary Cohen.
Markets will likely try to refocus on the economy and this week’s Federal Reserve policy meeting.
Sterling
Sterling managed to eke out modest gains against most major currencies as the international community, including the United States, backed Prime Minister May’s strong stance against Russia following the nerve agent attack on a former British spy and his daughter. The UK has expelled 23 Russian diplomats, prompting Russia to follow suit and the British government is considering further sanctions against Russia.
Euro
The Euro rallied mid-week but gave back all its gains seemingly due to a combination of factors. These include concerns about the impact on European growth from possible US tariffs on steel and aluminium (and potentially German car imports), European Central Bank board members expressing concern with Euro volatility and a fall in Eurozone CPI-inflation to 1.1% yoy in February from 1.3% yoy in January.
Chinese Renminbi
Despite numerous recent personnel changes in the upper echelons of power, the Renminbi was very stable last week. China’s leadership is seemingly keen to show that the appointment of Yi Gang as the new central bank governor (who replaces Zhou Xiaochuan) would not herald a substantially different path for monetary policy.
A heavy data and events week for the US, UK and Eurozone, with the Federal Reserve and Bank of England holding policy meetings on Wednesday and Thursday respectively. But domestic politics (in the US, China and Japan), regional politics (UK-EU) and global geopolitics may continue to hog the headlines.
Tuesday 20th March
United Kingdom: Consumer Price Inflation (Feb) Consensus forecast that yoy headline/core inflation fell to 2.8%/ 2.5% as Sterling inflationary pressures fade. Sticky inflation would increase probability of May hike. House prices (Jan) +5.3% yoy in Q4 2017 (vs 6.7% yoy in 12 months prior to referendum)
Eurozone: German ZEW Economic Sentiment (March) Key gage for Eurozone’s largest economy. Index fell 2.6pp in February to 17.8.
Other: G20 Meetings Key topics likely to include threat to global trade and growth from US protectionist measures and rise in global interest rates
Wednesday 21 March
United States: Existing home sales (Feb) Monthly sales remain broadly stable around 5.5mn (annualised) Federal Reserve meeting 25bp rate hike expected with focus on press conference and forecasts whether FOMC signals more than 3 hikes in 2018
United Kingdom: Labour market (Jan) Unemployment rate likely stable around 4.4% so focus will be on earnings growth which rose to 2.8% yoy in Dec. Series volatile but any uptick would increase probability of May rate hike.
Eurozone: Eurozone flash PMIs (March) Key gage of Eurozone economic activity in services and manufacturing. Composite PMI fell to 4-month low in February
Thursday 22 March
United Kingdom: Retail Sales (Feb) Important barometer of consumer sentiment. No clear trend in past 10 months. Volume flat in Jan. Bank of England meeting Policy rate likely to remain on hold at 0.50% but MPC may clearly signal risk of 25bp hike in May
Eurozone: German ifo Business Climate (March) Index fell 2.2pp in Feb to 115.4 but still lofty levels EU Summit (22-23 Feb) European Council expected to approve 21-month transition agreement with UK
Friday 23 March
United States: Core durable goods orders (Feb) Key indicator of capital investment in the US. Fell 0.3% mom in January.
