What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
GBP’s rally sustainability depends on trade deal success
The UK last week enjoyed a significant improvement in the pound. This was triggered by the aftermath of the US Presidential election, where over the weekend the news networks handed the, increasingly likely, win to Joe Biden. It wasn’t long before the GBP got a further boost, with the announcement from Pfizer and BioNTech that the vaccine they had developed was 90% successful in combating COVID-19. Additional media reports suggested that there were some side-effects to the vaccine, but the markets were buoyed by the optimism surrounding this ‘breakthrough’. The benefit to the UK was that, if COVID-19 has had a more negative effect on the UK during the pandemic, then in recovery the UK should benefit more as well, or that is the theory at least.
The UK economy did put on an impressive recovery in Q3 figures, growing by 15.5% quarter on quarter, but that still left output 9.7% lower than at the beginning of 2020. There were also some further impressive figures from the UK housing market, with the October RICS (Royal Institution of Chartered Surveyors) house price balance survey reporting prices up again. The stamp duty changes deployed by the Chancellor remained a key driver of activity across the UK housing market. The only negative from the data was labour market figures, which reported a worsening in conditions, with a sharp drop in employment and rise in unemployment in September, though the claimant count did drop back in October.
There was no breakthrough in the UK/EU trade discussions, despite another round of intensive negotiations between the two sides. The EU have suggested it’s now make your mind up time for the UK regarding whether they want a trade deal or not, and the UK will have to move in order to make it possible. The talks will continue for now, but will the departures of Dominic Cummings and Lee Cain from No. 10 alter the UK’s approach to EU trade discussions? Not according to the Prime Minister’s official spokesman, James Slack, who said last week that the UK’s position on trade negotiations hadn’t changed, nor the UK’s Chief Negotiator, David Frost, but time will tell.
Whilst there is little near-term prospect of additional loosening from the Bank of England, at least ahead of year end, the performance of the UK economy heading into year-end will inform the Bank’s decision making.
This week’s data releases include inflation figures for October on Wednesday, and public finances and retail sales figures for October on Friday. Inflation is expected to hold at 0.5% year on year on a headline basis, with core prices remaining at 1.3% year on year also. The public finances are likely to see borrowing figures exceed £30bn for a second month in a row, whilst retail sales volumes are expected to have fallen in October, for the first month since April, when the UK was in lockdown. The pound may struggle to make additional gains versus the USD and EUR (beyond last week’s highs), in absence of any positive developments on Brexit, vaccines or infection numbers.
More loosening, but ‘non’ to negative rates
The European Central Bank are gearing up for more monetary loosening in December, but it was clear, after comments last week from its President, Christine Lagarde, that negative interest rates were not being considered at this stage. The ECB (European Central Bank) view the current Pandemic Emergency Purchase Programme (PEPP), and targeted longer term refinancing operations (TLTROs) were the weapons of choice for the ECB at this juncture. The ECB are expecting that the Euroland economy will suffer a further downshift in activity because of renewed lockdowns and restrictions in the likes of Germany, France, Spain, and Italy. The figures from the German ZEW (Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) survey for November reported both the current situation and expectations indices worsening more than expected, which is perhaps a portent of things to come in the German IFO (Information and Forschung / Germany’s Institute for Economic Research) survey and Euroland manufacturing and services PMI (Purchasing Managers’ Index) indices released not this week, but next. There was some positive news, in the form of French and Spanish consumer prices figures for October, deflationary forces easing versus September.
This week is quiet in terms of data releases, with Euroland final October consumer prices released on Wednesday, the only release of note. More ECB speakers are scheduled, with Guindos, Hernandez de Cos, Lagarde, Mersch and Villeroy providing some significant interest. They are likely to repeat the sentiments already expressed last week, building market confidence of a substantial loosening to come. However, given the reported positive progress on a vaccine for coronavirus, perhaps the language for loosening will be toned down, such that it tempers expectations of a larger round of asset purchases. The improvement in the vaccine news is tempered by a worsening in case numbers across Euroland, which has forced additional restrictions and lockdowns. These have setback the prospect of regaining the lost economic output. Though there are some signs that deflation pressures may be easing in the country specific consumer prices data, the ECB will likely want to add additional stimulus, predominantly because of the deflation threats.
Fed’s Powell hints at more loosening whilst inflation undershoots
US Federal Reserve Chair Jerome Powell spoke at the ECB forum last week and indicated that the US economy would not ‘return to normal’ in the wake of the pandemic. He made it clear that the US Federal Reserve would like to see further fiscal stimulus deployed by the US authorities, and that the Fed would deploy more monetary loosening to support the goals of price stability and economic growth. However, his comments also indicated that the US Fed might go it alone in the upcoming meetings, even if the government were unable to agree on further stimulus measures. That was brought into sharper focus by last week’s consumer price inflation figures, which showed the headline rate dipping further in October, despite some additional improvement in growth numbers generally. The Fed Chair’s comments served as a reminder that the US and global economies are operating way below pre-pandemic levels, and the growth prospects for the US economy will be, at least in part dependent on a return to greater ‘normality’ in terms of the US population’s day to day lives.
For the week ahead, the US figures due for release, which include retail sales, industrial production and housing data for October, should offer additional optimism in terms of activity. Both retail sales and industrial production are expected to have risen on a month on month basis, and the housing market has been one of the standout performers in terms of the US recovery, operating well above the levels achieved by the economy in general. None of the data releases this week will argue against further loosening from the Federal Reserve, and with yields having risen over the past few weeks, there is more scope for asset purchase deployment in any case. As for the USD, it continues to suffer as risk appetite improves. The risk is that the trend continues for this week, especially if the data shows another bounce back for the economy.
Rest of the world
New Zealand deploys more loosening; but Turkey now the focus
Last week saw the (RBNZ) Reserve Bank of New Zealand) deliver additional monetary loosening, in the form of a funding for lending scheme. The scheme will help NZ commercial banks deliver cheap loans to businesses, but is restricted in the first instance to NZ$100bn. The announcement was little surprise to markets, and the NZD rose afterwards against the USD, but more because of improvements in risk appetite, which worked against the USD.
This week sees a number of central bank meetings from around the rest of the world. The vast majority of them should see monetary policy left on hold, but there will be interest in at least a couple of the decisions. The central banks of Hungary and Thailand meet on Tuesday and Wednesday respectively. Hungary has limited room for monetary loosening, despite increases in coronavirus infections, and though headline inflation pressures have eased somewhat, and the HUF has strengthened, there is no demand for a further loosening. In Thailand, rates are also very low, and the central bank has a new Governor in situ, Sethaput Suthiwart-Narueput. He will have been encouraged by the bounce back in economic activity in Q3 figures, released early on Monday, which recorded a much larger recovery than expected. No change expected there either.
Thursday is when things get interesting, in the form of two very different central bank meetings. Indonesia’s central bank meet early on Thursday morning, and could cut interest rates from 4% to 3.75%. The recent improvement in the rupiah and low inflation rate, coupled with weak growth and solid trade surpluses, suggests that the economy can withstand a further rate cut, even if the market isn’t expecting one. If the Indonesian central bank doesn’t cut, then the rupiah could appreciate further, which could suppress inflation further, in the future.
The second meeting is the central bank of Turkey, who recently have seen a new Governor installed, after the last one was fired by the country’s President, Recep Tayyip Erdogan. A hike in interest rates is expected by the markets, but there is a difference of opinion as to how much they will hike by. A 3 percentage point increase is most likely, to try and shore up confidence in lira, and bring inflation back under control. Anything less, might harm the economy, without helping the fight against inflation.
The central bank of Philippines and the SARB (South African Reserve Bank) also meet on Thursday, but no change is anticipated from either of these, after strong growth in the Philippines in Q3, and the SARB are still gauging the effects of previous loosening.
This week, the RBNZ kicks off the central bank meetings. Economists are near unanimous that there won’t be a rate cut, but the RBNZ has hinted at expanding monetary support before year end. This is likely to come in the form of a funding for lending programme (FLP) reducing borrowing rates, boosting credit availability and putting downward pressure on the NZD as well. They might expand the asset purchase programme as well, but won’t follow in the RBA’s footsteps in my view.
The Mexican central bank may also reduce interest rates as well, especially with the recent in the Mexican peso. However, on the flip side, a lack of action from the Federal Reserve last week might make the central bank more reluctant to loosen. The Central Bank of Peru is also expected to stand pat, with coronavirus infections dropping back in recent weeks. There is limited room for conventional loosening in Peru, and weakness in the Peruvian sol further argues against any additional monetary stimulus.
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