Weekly Currency Brief – 5Sep – 12Sep 2017

A week of surprises and signs of future policy tightening

Pound treads water despite strong tides

Last week was a tough week for the pound, with pressure from the Markit / CIPS Services PMI earlier in the week as well as the ECB announcement and the initiation of the debate in the Commons about the Great Repeal Bill. Despite some slips, it largely held its ground but the twin blows of Mario Draghi’s cautious tone in yesterday’s ECB press conference and the challenging start to the Brexit debate which saw PM Theresa May and Brexit Minister David Davies get a rough ride from both sides of the house mean that there may be more trouble ahead.

Euro keeps gathering strength

The story for the euro has been that it started strong and kept getting stronger. Despite some concerns being voiced about the headwinds that European exporters are starting the face because of the currency’s value, the ECB adopted a cautious tone in their announcement. There are signs that there may be changes to policy forthcoming in October, but until then the currency will continue to gather strength largely unchecked. The strength of the euro is, in part, due to the contrast between the weaker pound and US dollar, but Eurozone growth is also a factor. The growth has been stronger than expected this year, and the ECB predicts this will now come in at decade-high of 2.2%

Dollar labours on

The Labor Day national holiday in the US meant the dollar was off to a slow start, but dramatic events later in the week made up for this. The prospect of a possible government shut down in September had been weighing on the dollar, but a surprise decision late on Wednesday to raise the debt ceiling and extend funding until 15th December means that this has been prevented in the short term. The US is still beset by challenges at home and abroad, however, with significant damage in Texas due to the hurricane and from the California wild fires to be addressed as well as the ongoing threat from North Korea. The net result was that despite the decisive action, the dollar remained weakened and struggled to maintain its position.

Aussie dollar starts strong

The Australian dollar had a strong week, although it stumbled slightly later on. The strength can largely be attributed to weakness elsewhere, from the US and NZ dollar and the pound. July retail sales data from Australia showed that consumer spending was stalling and the trade surplus was listed at $0.46 billion, the lowest number for three months.

No news is good news

The New Zealand dollar started the week by hitting a 15 month low against the Australian dollar. This was attributed by the uncertainty caused by the upcoming election, but as the week went on, this levelled out somewhat. It’s not entirely in the Kiwi’s favour; there are signs that neither leading party would be good for the currency but that is at least a form of certainty and allowed the currency to hold its ground. There was no good news from New Zealand this week; figures regarding economic growth across Tasman caused a slight dip, but ongoing tension in North Korea has kept the US dollar under pressure and stopped the Kiwi from losing too much ground.

Surprise! Canada raises rates

The loonie is on a winning streak; like the Aussie dollar it is somewhat boosted by relative weakness elsewhere. However, the Bank of Canada (BoC) raised interest rates for the third time this year to 1% midweek and this sent the Canadian dollar soaring against its US rival. In making the announcement, the BoC stated that it was withdrawing some of its considerable stimulus due to Canada’s strong economic performance. The result was that the currency gained at least 2% against the US dollar in the day following the announcement, to reach its highest levels in almost two years and employment figures due today could further add to the momentum.