What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
Latest trade talks due to conclude, will this be another blow for sterling?
The UK figures last week offered a mixed picture for the UK economy. The September data from the housing market remained buoyant, services PMI (Purchasing Managers’ Index) rose versus provisional estimates, the construction PMI rose and business confidence rebounded.
However, the most awaited releases were GDP (Gross Domestic Product), industrial production, services output and construction output for August at the end of the week. These disappointed expectations, with overall GDP growth rising by just 2.1% month on month, less than half of what was expected, in spite of the incentives offered by the Treasury towards the hospitality sector. If the effects of the schemes had been removed, then growth would have been even more anaemic in August. That said, these data bore little resemblance to the retail sales figures, released a few weeks prior, that had indicated a relatively buoyant consumer sector. The slowdown in growth, coupled with renewed restrictions being put in place in the North of England and Scotland, has intensified the need for additional fiscal, and perhaps monetary, stimulus. The Chancellor has outlined additional support to affected sectors, and further changes to the furlough scheme in order to help protect jobs, and the government’s approach remains consistent with attempting to prevent another UK wide lockdown being implemented.
For this week, the emphasis is on the UK labour market figures for August/ September. These could report a jump in unemployment and a drop in employment as the furlough scheme wind down continues. This news could prove GBP negative, and the markets have virtually ignored the news that the BoE (Bank of England) is surveying financial institutions to further explore the viability of negative interest rates. This is another leg of the technical work that the BoE are undertaking, but again demonstrates that this isn’t them just war-gaming the strategy.
Also this week, the latest round of trade talks between the UK and EU are set to conclude, so will there have been any breakthroughs? The pound is holding up, despite each round of negotiations passing by without the impasse being broken, and this round of negotiations concludes immediately prior to an EU Council meeting. Both sides are still playing hardball, and yet neither side wants a no-deal.
After some encouraging signs of a dialling down of the rhetoric, it is discouraging to see politics once again flexing its muscles instead of economics. Given the fears of renewed economic damage from another pick up in coronavirus cases, for the UK and Europe, common sense needs to prevail. The pound may struggle to make additional headway higher against the USD, especially if the data is weaker and the trade talks fail to deliver any upbeat news.
Infections back on the rise, as Euroland’s poised for more survey evidence
The increase in coronavirus case numbers across a number of key economies in Europe argues increasingly strongly for more fiscal stimulus. As for monetary policy, anybody looking at the consumer price inflation figures would be hard pressed to argue against the need for more monetary loosening as well, given that deflationary forces seem to be strengthening.
In France, Paris announced that all bars would close from Tuesday, after Marseille was forced to closed its bars, restaurants and gyms for two weeks on the 26th September. Germany has meanwhile put Munich into tighter restrictions, alongside Berlin, Cologne, Frankfurt and Stuttgart. Could the coronavirus upsurge further hurt the European recovery, and if it does, what additional firepower do fiscal and monetary authorities have at their disposal? For example, would the European Commission be prepared to offer additional fiscal support? Are individual government’s prepared to add to their support packages? Will the European Central Bank print even more money, to suppress yields and support governments’ efforts to boost growth and accelerate the recovery?
This week sees the German ZEW (Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) survey for October released on Tuesday. This is likely to record an improvement in the current situation index, but a pull-back in expectations. That said, for any economy, the greatest concerns are not about the future but the present, so this release could provide some relief to the Euroland markets, albeit temporarily.
European Central Bank (ECB) President, Christine Lagarde, is set to speak twice this week, and Chief Economist Lane once, and these speeches could offer some additional insight into the ECB’s thinking ahead of their end of October meeting. The ECB may still be reluctant to loosen monetary policy further, as it could reduce their firepower if additional loosening becomes a more pressing requirement, as well as reducing the pressure on governments to increase their fiscal support.
Election dominating, as authorities are still deadlocked on further stimulus
The current US Presidential election seems to continue to dominate all before it. Last week saw the President, Donald Trump, refuse to appear in a ‘virtual’ second debate, after changes were proposed because of his positive COVID diagnosis. He then proposed a delay to the debates, such that they would take place on the 22nd and 29th October, but that was rejected by the Joe Biden campaign.
Meanwhile, talks about additional US fiscal stimulus were on, then off, then on again, with both sides attempting to position themselves as more reasonable, whilst both playing politics. More talks are set for this week, and whilst the White House advisor, Larry Kudlow, seemed to be optimistic about the White House offering more stimulus cash, he didn’t specify where that cash would likely head.
As far as the polls are concerned, the fivethirtyeight report now has Biden at an 86% chance of being victorious on 3rd November, so Trump is less than half as likely to win as he was in 2016. Trump’s best chance of winning the election seems to be via the debates, but with now only one to go, is it realistic to think he can turn it around? From an economic perspective there were further signs of improvement from the US, but last week did see consumer credit figures for August surprise, with a net repayment of over $7bn versus expectations of an additional $14bn being utilised.
This week sees September consumer prices and retail sales figures as the key releases. Retail sales values are expected to have recovered further, and consumer prices are expected higher on both the headline and core measures. Overall though these figures won’t offer the markets anything particularly different in terms of the economy’s evolution and as such likely will not provide any big surprises to spark any material changes to the US dollar, equities or US Treasuries. Third quarter earnings season might provide more interest for financial markets, and there may be some big surprises from these numbers in terms of businesses that have done well, or badly, through the pandemic.
Rest of the world
Attention turns to South Korea, might they loosen policy?
Last week saw all the major central bank meetings end with no changes to policy. The RBA’s (Reserve Bank of Australia) decision to leave policy unchanged was accompanied by some hints that additional loosening might be sanctioned in the months to come, with weak growth and a strong Aussie dollar still troubling the RBA.
The National Bank of Poland left the policy rate unchanged at 0.1%, but also unveiled a very pessimistic economic outlook, which will have undermined the case for any tightening as advanced by some members of the MPC (Monetary Policy Council) as recently as the week prior to the meeting. The central bank of Peru also left monetary policy unchanged and noted that policy would remain at all-time lows for as long as is necessary to lift the economy from its COVID-driven slump.
For this week, there is at least one central bank that could loosen monetary policy. The Indonesian central bank begin proceedings for this week on Tuesday, but aren’t expected to loosen policy despite having the greatest room to cut from any of the central banks scheduled to make announcements. The problem remains the weakness of the rupiah, since the inflation and GDP data pose no barrier to a rate cut.
The central bank of South Korea meet on Wednesday, and they could ease policy, even though the market doesn’t expect it. The Governor, Lee Ju-yeol, has hinted that he is prepared to loosen further to support the recovery, and markets should not be taken by surprise if rates are loosened further.
Finally, the Monetary Authority of Singapore are due to announce on Wednesday as well. They should remain on hold, with the third quarter expected to record a strong rebound in activity, and no signs of intensifying disinflationary pressures.
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