What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
Sterling holds ground as trade talks stalemate
The two week marathon of UK and EU trade talks ended last week with no progress having been made again. Instead of a further commitment to work towards a deal in future negotiations, the EU Council released a statement suggesting that it was up to the UK ‘to make the necessary moves to make an agreement possible.’
PM Boris Johnson countered by suggesting that the UK is now preparing for an Australia type arrangement with the EU (which is World Trade Organisation rules by another name). However, negotiators are still set to meet this week, so it looks like brinkmanship, rather than the end of talks altogether.
Meanwhile, the UK saw coronavirus case numbers continue to increase, restrictions tighten on London and other major cities and areas, increasing the downside risks to activity. Unemployment rose and employment fell by more than was expected in the August figures, but bizarrely the September HMRC payrolls data recorded a 20k rise from August.
Some other good news came from the British Retail Consortium, which recorded stronger like for like sales values growth in September, and sales up 4.7% in value terms on a total basis. The news of yet another failure in UK/EU trade talks left the pound under pressure again, but interestingly it held up better against the EUR than the USD.
This week’s UK big releases include September consumer prices and public finances on Wednesday, whilst Friday sees the October GfK (Growth from Knowledge) consumer confidence index, provisional October PMIs (Purchasing Managers’ Index) and September retail sales figures released. Often the figures have little impact on the GBP, but the risks are for weakness in the data, with the exception of the retail sales data.
Certainly the PMI surveys could be under pressure because of the increased lockdown measures, including in the capital and across important cities in the north. The pound is therefore vulnerable to a renewed sell off, particularly against the USD. Markets are nervous, both about the increase in restrictions because of the rise in COVID numbers, and because the tightrope being walked on trade negotiations. The gravity defying performance of last week for the GBP will prove hard to replicate this week.
Second COVID wave puts EUR under pressure
Euroland’s coronavirus case numbers continued to rise sharply in major countries. France saw confirmed cases up by over 30k last week, and the rise in cases prompted President, Emmanuel Macron, to introduce a curfew for 9 cities, including Paris. That compels bars, restaurants and other social venues to shut from 9pm until 6am for a period of four weeks.
Germany also introduced some additional restrictions on cities, as case numbers continued to increase, although Chancellor Merkel’s measures were more piecemeal, and less stringent on hospitality versus those in France. Meanwhile, the German ZEW (Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) survey recorded a sharp fall in expectations and only a slightly above consensus improvement in the current situation index in October. Inflation figures for September confirmed that deflationary forces were, if anything, intensifying, with Italy record a 1% fall in prices in September versus 2019.
This week sees more survey data due for release from Euroland countries, culminating in the provisional October Euroland PMI surveys for manufacturing and services on Friday. These are expected to record a further slowdown in activity for both sectors, albeit that the drops from September are likely to be of a lower magnitude versus the drops in the UK PMIs released at the same time.
Ahead of next week’s European Central Bank meeting, any additional loss in momentum might increase speculation of further monetary loosening, and ECB (European Central Bank) President, Christine Lagarde, has indicated that the ECB is ready with more stimulus if required.
The EUR though is struggling to make and sustain any headway against other majors, and this week’s releases are hardly going to provide any additional fundamental support for the EUR.
Wavering optimism around fiscal stimulus talks
Over in the US, last week’s fiscal stimulus flip-flopping by both sides in the negotiations got precisely nowhere. One minute there was room for more talks with the possibility of the President going further than $1.8 trillion in measures. The next, both sides were, purportedly, so far apart on what was necessary to help the US economy, that further talks were pointless. However, Senate Republican Leader, Mitch McConnell, seemingly torpedoed any remnants of hope, stating that “what we laid out, a half a trillion dollars, highly targeted, is the best way to go.”
Meanwhile, the second US Presidential debate didn’t happen, instead Trump and Biden appeared at town halls with NBC and ABC respectively. These are unlikely to have shifted public opinion, with the polls leaning ever more heavily towards a Biden victory.
There were some positive data releases, but the news wasn’t overwhelmingly positive. Small business optimism rose in September, but jobless claims rose in the week to 10th October. Retail sales values leapt 1.9% in September, but industrial production fell unexpectedly, by 0.6% month on month. Overall, the figures suggested that consumers were prepared to spend, but underlying activity remained weaker elsewhere.
For this week, a lot of attention will focus on the Federal Reserve’s current economic assessment, or Beige Book, released on Wednesday, ahead of the 5th November FOMC (Federal Open Market Committee) meeting and monetary policy decision. If there are additional signals of a strengthening recovery from most districts, then the Fed are likely to sit on their hands again, especially as the Presidential election will have concluded and so the Fed may want to see whether additional fiscal stimulus is forthcoming
Fed Chair, Jerome Powell, is an advocate of additional fiscal stimulus, but can such measures be agreed across all arms of the US government? Should the US government agree to a further bout of stimulus, the Federal Reserve will have to look at whether the current levels of QE (quantitative easing) will continue to control yields, or whether more is required. It is more likely than not that more QE will prove necessary.
Rest of the world
Focus on Turkey to see rates hike
Last week’s central bank meetings broke up with no loosening from any of those scheduled to announce. This was largely expected, although there was a risk that the South Korean authorities would sanction a loosening to alleviate the ongoing negative effects of COVID-19.
The Indonesian Governor, Warjiyo, noted that the recovery was set to continue, and that the currency would continue to appreciate. That latter point is debatable, since the IDR has made no progress against the USD since the end of July.
The South Korean Governor, Lee, dialled down hopes of quantitative easing, instead only offering continued low interest rates until the economy returned to its growth path. That said, with infection numbers falling, and with economic data on inflation and activity improving, the central bank can be forgiven for holding back from offering additional loosening measures at this meeting.
Chile also kept monetary unchanged, despite a rise in demand and inflation, which they saw as temporary. The door was left open for further monetary accommodation if necessary, whilst the two year projection still sees the possibility of a tightening towards the end of the forecast horizon.
This week sees several central banks due to announce. None are expected to loosen monetary policy and one is expected to tighten. Hungary begins proceedings on Tuesday and is expected to leave official policy rates on hold, with the forint under pressure against the euro.
Turkey is due next, with its decision on Thursday likely to see official rates hiked by 200 basis points, as they continue to tackle high inflation and a weak lira. More tightening may be required, but against a backdrop of weak activity, will prove difficult to sanction at this juncture.
The BoI (Bank of Israel) is also due to announce on Thursday, but with rates at 0.1% the focus is likely to remain on quantitative easing and FX interventions to weaken the shekel. Inflation is negative, so the BoI could step up QE programmes towards the year end, or early part of 2021.
Finally the Russian central bank announce on Friday. Rates are expected to remain at 4.25%, with a weakening ruble problematic in terms of additional monetary loosening, although there are no signs of a pass through onto higher inflation. No easing required from central banks, but could the Turkish authorities surprise with a bigger rate hike?
To read the previous quick take, click here.