What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
Sterling under pressure as second lockdown looms
The UK media was full of stories last week about the Brexit negotiations, with suggestions of a compromise being achieved on fishing and both sides restating that their aim is to get a deal done. However, time seems to be running out on these negotiations, and the UK and EU still seem to be some way apart on other issues. The prospects of a deal being done continue to outweigh the prospects of no deal, although there is a risk that the UK and EU sleepwalk into no-deal, expecting further concessions to be offered by the other party.
Last week also saw the UK government announce a second lockdown, due to begin on Thursday for four weeks. This lockdown is different to the last one, with the schools and universities remaining open. Undoubtedly this will have a negative effect on the economy, although we could see online retailers benefiting from the lockdown again, as they did during the first one. How negative will this be for the UK economy? It is likely to further setback the recovery by an additional quarter or two, but as with the last lockdown it will depend on whether spending is delayed or cancelled for both individuals and businesses.
This week sees the UK Bank of England meet. The prospect of an easing of policy has been increased by the announcement of a second lockdown. There is room for more money printing, but will that prove effective? We already know that the Bank is continuing the technical work around negative interest rates. It is probably too soon to expect them to seriously consider negative rates, but they could add an additional £100bn onto the asset purchase programme, especially as the government is set to borrow even more to support those adversely affected by this latest lockdown. Meanwhile the pound is under pressure, falling back from $1.30 last week. It has held onto most of its recent gains against the euro, but will another bout of monetary loosening hurt the pound and risk appetite, as well as lower yields across the curve as well?
European Central Bank (ECB) speeches in focus, will there be strain on the plain old EUR?
Last week’s ECB meeting saw the Governing Council leave monetary policy on hold. However, the statement, accompanying the decision recognised that the situation for Euroland was changing because of the new surge in COVID infections across Europe, and that in December there would be a new round of forecasts to allow the ECB to recalibrate its monetary policy stance. The scale of the challenge for the European Central Bank remains sizeable, with the major economies showing renewed signs of strain under tighter restrictions or lockdowns. There may also need to be additional fiscal stimulus, with smaller European nations likely to have less room for fiscal loosening at their disposal. Could that mean the EU have to expand their programme for debt issuance? The data and surveys released last week pointed to a drop in measures of business and consumer confidence in some countries in October, ongoing deflation risks and a sharp fall in consumer spending in France and retail sales in Germany. Even without the lockdowns and restrictions, that would argue for additional fiscal and monetary loosening.
This week sees little important data due for release, but a whole host of ECB speakers. Those speeches will be closely scrutinised for indications of what the ECB intend to do to help the economy. Negative interest rates aren’t likely to be considered in my view, but there is room for more asset purchases, with the programme likely to be expanded to €1.75 trillion from the current €1.35 trillion. It is more likely than not that the ECB loosen again in December, and the only question is by how much they do so? To loosen only a little will leave them with more firepower if necessary. Hopefully, speeches from the likes of Mersch, Knot, Panetta, Schnabel, Guindos, Muller, Holtzmann and Weidmann will provide greater clarity as to what additional loosening will be deployed. The EUR could come under some pressure if the markets aren’t convinced by the limited data releases and what is said by these ECB speakers.
Elections on the home run, how will the dollar play?
The US Presidential election is held today. This campaign has been very different to all other Presidential campaigns, and the candidates are making their last round of tours of the country to ensure that they get their supporters out to vote. The national and state polls still have Joe Biden leading the race comfortably, and most projections have him winning the electoral college vote. There is around a 1 in 8 chance of the current President, Donald Trump, winning the election, which would make a Trump victory one of the largest upsets in US election history (after his victory in 2016). The key electoral college’s votes will come through in the early hours of Wednesday morning, Europe time, and by the time the markets open in Europe we should know the result. A Trump win is most dollar positive and a Biden win is most dollar negative, given their stated economic, diplomatic and trade policies. Meanwhile, whoever wins will have to deal with the surge in COVID-19 infections again seen in the US in recent weeks.
Post the US election results, the Federal Reserve are set to meet this week and then the US October non-farm payrolls data is due for release. The Federal Reserve isn’t expected to loosen policy this time around, although there is a small chance that it could sanction an expansion of the quantitative easing programme. The negative effects of the increase in COVID-19 infections, and the possibility of a re-introduction of measures to slow the spread of the virus could prompt additional loosening before year end. The Fed though is likely to want to wait and see whether whoever wins the US election will be able to push through another stimulus plan. Meanwhile, the US non-farm payrolls data are expected to record another slowing in the pace of jobs returning to the US economy, but at around 600k, this could still be viewed as an ongoing strong recovery for the US labour market.
Rest of the world
Attention turns to Australia as the likely country to ease
Last week’s key meeting was the Bank of Canada. It didn’t loosen policy further, but did lower the estimates of the neutral rate, from 2.25 - 2.75% to 1.75 - 2.25%. That is significant in itself, but it were also cautious on their inflation projections, and suggested that there would be significant slack in the economy until the end of 2023. That final estimate looks optimistic, and whilst the Bank of Canada may be reluctant to ease further, it may have to if the coronavirus pandemic continues to lurch on without any resolution. All the other central banks left policy on hold, as expected, with Kazakhstan, Brazil, Japan, Hungary and Colombia all keeping their powder dry, but continuing to suffer under the effects of the pandemic.
This week of central bank meetings begins with the Reserve Bank of Australia (RBA), who is expected to loosen monetary policy despite the data and survey releases recently pointing to some strength in economic activity. The RBA is only expected to reduce interest rates to 0.1% from 0.25%, but that still brings into focus the possibility of negative interest rates. It’s is unlikely that a move to negative rates will be sanctioned by the RBA, but we should watch closely for the statement accompanying the decision.
We also have decisions from the Malaysian central bank, the National Bank of Poland (NBP), the Norges Bank and the central bank of the Czech Republic. None of these are expected to loosen monetary policy, with interest rates already on the floor, but it will be worthwhile seeing whether the NBP or Czech central bank discuss additional loosening measures. With rising coronavirus case numbers across Europe and in places such as the Czech Republic, additional stimulus is likely to be required at some point.
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