Global Market Watch - 20th August 2018
Having just had a two week summer break I was wondering if the themes that were in play for the currency markets when I left had changed on my return. The main idea was that sterling was under pressure from Brexit, in particular GBPUSD which was the leader in this weakness as the dollar was strengthening. There was a question mark about how far or fast GBPUSD could fall as we were above the psychologically important 1.3000 and the Bank of England was expected to hike rates by 0.25%. On my return, with the Bank of England hiking rates as expected and the market considering that it was a "one and done", not much has changed in the overall theme for the pound with GBPUSD losing 3% in two weeks. The UK worker has also experienced another pinch on living standards with inflation at 2.5% and average wage increases of 2.4%. As for Brexit, the probabilities of a "no-deal" Brexit have increased although this could be a ploy by the UK government to try and squeeze concessions from the EU. Looking forward to this week we expect Brexit to continue to be a negative for sterling but Tuesday's PSNB could possibly provide positive news for the pound as the tax man (HMRC) gets an increase in corporate tax receipts in July. Wednesday will be important with the release of the latest FOMC meeting minutes.
Before I left for the sun there was still a possibility that the euro could move higher to touch above 1.1700, but the latest Turkish lira collapse put paid to that. The sequence of events was that President Trump, having previously complimented Turkey's President Erdogan, doubled tariffs on Turkish steel and aluminium imports because the Turkish President would not release a US Pastor accused of supporting the attempted 2016 Turkish coup. The TRY then collapsed, falling some 20% in 24 hours against the dollar. With President Erdogan and his son-in-law in charge of the Turkish economy, the market does not have the confidence that they will be able to control inflation of 16% or that the economy could withstand US tariffs. But why should that affect the euro? Because European banks are huge lenders to the Turkish economy and if the Turkish economy fails, as the probabilities suggest it will with President Erdogan at the helm, those banks and the Eurozone will face huge losses. EURUSD fell some 2.5% over the past two weeks and coming to the fore are comments from the Italian government blaming the EU for a tragic bridge collapse and proclaiming that it will not stick to the EU's budget deficit rules. ECB MPC meeting minutes are released on Thursday and German final GDP on Friday.
In early August President Trump complained about the strength of the dollar but tweaked his tune last week when he tweeted that, "Money is pouring into our cherished dollar like rarely before." With the Fed being consistent in its interest rate narrative and suggesting two more rate hikes this year (probably September and December), the dollar is moving higher in a trend like manner. This week we have the release of the FOMC meeting minutes on Wednesday, followed by the Fed's Jackson Hole conference starting on Thursday and Fed Chair Powell scheduled to speak on Friday. US Durable goods are released on Friday as well so we could easily have a busy week.
The commodity currencies have had a tough time of it as they fell against the dollar and also have to deal with weakness in sentiment caused by a falling Chinese yuan, Turkish lira and South African rand. We have already covered the TRY and the ZAR now has its own problems as the land expropriation laws gain prominence with reports suggesting that the South African government is considering confiscating properties bigger than 25,000 acres. As around 20% of South Africa's farms produce 80% of South Africa's foods, and many of those farms are bigger than 25,000 acres, this move could have a very detrimental affect on the economy.