FX Outlook: Parky’s quick take – 23 November 2020

23 November 2020

Neil ParkerFX Markets Strategist

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What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.

United Kingdom

Data surprises but Brexit talks stall after positive COVID test

The news from the UK economy pointed towards higher short term consumer prices in October, and worsening consumer confidence in November, but not by as much as expected. The biggest data surprises came from public finances, where the deficit was much smaller than expected, and a surprise jump in retail sales in October, the sixth month in a row that volumes had increased. Overall, the news from the UK economy was helpful for the GBP, which rallied on additional risk appetite improvements, and more positive vaccine news from AstraZeneca, news that the Pfizer vaccine could get approval as soon as next week, and leaks that the UK government would end the lockdown on 2nd December, as promised.

However, last week did not produce the breakthrough in trade talks between the UK and EU, despite the UK negotiator, David Frost, reportedly briefing the Prime Minister Boris Johnson to prepare for a deal as early as the week commencing 23rd November. Notably, the talks came to an abrupt end after it was reported that one of the EU negotiators had tested positive for COVID-19, and it is unclear whether face to face talks can continue, with those who had come into contact with them possibly having to self-isolate. That could mean the talks continuing into yet another week, including the beginning of December, and the markets may not be as sanguine about the prospects for a deal then. 

The week ahead is relative short on UK data and survey releases. The question of how bad would the manufacturing and services PMIs be has already be answered, and in short they were better than expected, particularly manufacturing, which reported a rise in PMI (Purchasing Managers’ Index), against expectations of a sizeable drop in the index. The Bank of England’s Governor was due to be joined by senior MPC (Monetary Policy Committee) colleagues in front of the Treasury Select Committee. Given that the BoE (Bank of England) have recently updated their forecasts and sanctioned a further £150bn of quantitative easing, the markets shouldn’t have expected any further indications of additional loosening at this early stage, and didn’t get any. Notably BoE Chief Economist, Andy Haldane indicated that the vaccine news was better than the BoE had expected.

Questions over the continuation of Brexit trade negotiations should be answered in the early part of the week, and the only other release of note is the CBI (Confederation of British Industry) distributive trades survey for November, which will give clues as to any slowdown in retail.

As for the pound, it has strengthened against both the USD and the EUR in the past week but may face a greater challenge in building on those gains in absence of any significant data releases. It is unlikely that there will be any further notable announcements on vaccine developments for immunising against COVID-19. Even if there were, the markets have looked less receptive in terms of additional risk rallies recently.


PMIs lower, what about the other consumer confidence surveys?

Last week was a quiet one for data releases, with really only the Euroland final October consumer prices data of any note. The ECB (European Central Bank) speakers did indicate that further stimulus was coming, reiterating in large part the commentary from the previous week. It remains clear that the ECB Governing Council is considering boosting the Pandemic Emergency Purchase Programme (PEPP) and targeted longer term refinancing operations (TLTROs), rather than anything more drastic or surprising.    

This week has already seen the preliminary November PMI figures released from Euroland for manufacturing and services. Both readings fell, though manufacturing held up much better than expected. Tuesday sees the release of the November German IFO survey. After falls in other surveys, the same could be expected in this one, though based on the strength of the German manufacturing PMI, the IFO (Information and Forschung / Germany’s Institute for Economic Research) could hold up better than the ZEW (Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) did. Thursday sees the release of German consumer confidence for December, and French consumer confidence for November. Both are expected to report drops, as the lockdown eats into job security, general economy and expected income readings. The data and surveys ought to further assist the ECB in their decision making process, but given the positive news on vaccines, none of this is likely to harm the EUR, in my view.  

United States

Housing market boom continues, but data and surveys suggest a more general economic slowdown

The US economy looked to still be on an upward trajectory last week, albeit that the angle looked to be shallowing. Evidence from this came firstly from the November Empire manufacturing survey, which dropped to its lowest reading since August. That was swiftly followed by weaker retail sales figures for October, with both headline and ex autos sales values increasing by 0.3% and 0.2% month on month respectively. There had been outsized gains in September, but these were revised down as well. There was weakness also in the Philadelphia business outlook index, which fell to 26.3 in November from 32.3 in October, albeit this was a better outturn than market consensus forecasts. Finally, the coronavirus infection news continued to worsen. The US hit a new record high in new daily case numbers over the last week, suggesting that the issues for the US are far from over economically, regardless of the positive vaccine news.

On the positive news front, US industrial production rose more in October versus expectations, and there were a plethora of housing market releases that suggested the market continues to boom. The NAHB (National Association of Home Builders) housing market index rose to 90 in November, a new record high after the previous record high reported in October. Housing starts hit their highest level in October since February, and existing home sales hit their highest level in October since November 2005.

This week sees the Federal Reserve’s minutes of the 5th November FOMC (Federal Open Market Committee) meeting published. The Beige Book is released next week, but these minutes could provide additional clues as to the debate amongst Fed members, around the recovery and what further stimulus, if any, is required. Interestingly, the US Treasury Secretary looked to re-open fiscal stimulus talks with the House and Senate, utilising the untapped Federal Reserve relief funding in an effort to bridge a sizeable gap between the two sides.

The week is shortened by the Thanksgiving holiday, with the markets closed on Thursday. On the data front, this week has November consumer confidence figures from the Conference Board, Tuesday. Wednesday is packed with data and survey releases including latest week jobless claims, revised Q3 GDP (Gross Domestic Product), October trade deficit figures, October personal income and spending data, October new home sales, and the preliminary November University of Michigan consumer sentiment figures.  

The news flow may not be sufficient to materially turn the tide for the USD, but the pace of deterioration does seem to have slowed, so perhaps, as long as the data don’t throw up any shocks, there won’t be much additional weakening either?

Rest of the world

Surprises on both sides of the monetary policy spectrum

Last week’s central bank decisions were expected to be largely priced in by markets. Hungary got things off to a predictable start, leaving the base rate at 0.6% on Tuesday, followed by the Bank of Thailand, on Wednesday morning, who left interest rates at 0.5%.

After that, things got more interesting. The Icelandic central bank cut interest rates to a new record low on Wednesday, from 1% to 0.75%, with a worsening economic outlook and increasing COVID-19 case numbers, as the key drivers. As a significant minority of economists expected, the Indonesian central bank reduced interest rates from 4% to 3.75%, on Thursday morning, citing a stronger currency and forecasted persistent low inflation as reasons for the cut, and offering a room for additional loosening in the future.

The Indonesian cut was swiftly followed by a surprise cut by the Philippine central bank, who reduced the overnight borrowing rate to 2% from 2.25%, despite the central bank Governor, Diokno, downplaying the need for additional monetary loosening in recent weeks. Benign inflation and increased downside risks to economic activity drove the decision, according to the Governor, but the move appeared to be pre-emptive in a latest attempt to improve recovery prospects. The Turkish central bank then delivered a 4.75 percentage point hike in interest rates, more than had initially been expected, but the markets had quickly adjusted expectations. This prompted a rally in the Turkish lira, as confidence returned that the Turkish authorities had the matters of currency stability and imported inflation pressures back in hand. That could, over the coming quarters, prompt a reduction in borrowing costs, alleviating any additional negative pressure on the Turkish economy. Finally, the South African Reserve Bank left the repo rate unchanged at 3.5%, and signalled that the next move could be an increase, next year, and that despite two of the five strong committee supporting a 25 basis point rate cut for the second month in a row.

This week’s central bank meetings include Nigeria, the Swedish Riksbank, South Korea and Colombia. None of the central banks are expected to reduce interest rates or loosen monetary policy, although the additional pressure on Sweden from the rise in coronavirus cases could prolong the period of monetary loosening from the Riksbank. The markets are watching closely for the upcoming ECB and Federal Reserve meetings, as these may set the tone for additional loosening from around the rest of the globe, and particularly in emerging markets.

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