Global Market Watch - 17th June 2019
Sterling has been quite perky over the past two weeks, as the market considered that Brexit was on hold, and the Tory Party looked to elect a new leader. The market also saw a newly dovish Fed. However, as UK data has started to slip, and it is odds-on that Brexiteer, Boris Johnson, will be the next Prime Minister, sterling has started to slide again. Tuesday evening sees the BBC debate between the Conservative Party candidates for the vacant post of Prime Minister. On the data side, we have UK CPI on Wednesday, retail sales and the Bank of England interest rate decision on Thursday, and the BoE quarterly bulletin on Friday. At the end of the week, we should have a clearer picture of the state of the UK’s economy, and who will be next to lead the country.
The single currency has enjoyed support against the dollar recently, as the market prices in a US rate cut. However, while in the short-term more EURUSD strength could be seen, in the medium-term there are reasons to think euro strength will not be maintained. Firstly, the ECB last week was at pains to repeatedly talk their currency lower, as they stressed they needed more stimulus to get inflation and the economy moving forward. Secondly, there are reports that Italy is seriously considering issuing mini bills of Treasury (mini-BOTs). In plain terms, they would be used by the government to pay Italian businesses it owed money to, and therefore would reduce the governments huge debt.
Once issued, the mini-BOTs could also be used to pay taxes. Italy, of course, is currently being sanctioned by the EU for having too much debt. The problem is that the mini-BOTs will be legal tender, and thus will be seen as a parallel currency to the euro. This is explicitly prohibited in EU law, and as such, if the mini-BOT goes ahead, it has the potential to wreak havoc with the single currency. Last week ended with some good news for the SEK, as CPI came in at 2.1%, above the Riksbank’s inflation target of 2.0%. This week, we have the release of Swedish business and consumer confidence as well as the important unemployment rate.
The dollar was looking a touch soft at the end of last week, as the market looked to the Fed meeting this Wednesday. However, on Friday very positive retail sales data showed that the US shopper is still in fine form. Last month’s decline of 0.2% was actually revised to an increase of 0.3%, and this supported the dollar into the weekend. This puts the Fed in a tight spot, as it meets on Wednesday to set interest rates. Although the market doesn't particularly see a rate cut next week, it has priced in a rate cut in July, because of the weak non-farm payrolls data released at the start of the month. The market will be keen to hear what Fed Chair, Powell, has to say about the prospects for a rate cut in July, as after the retail sales figures, a cut is less rather than more likely.
Chinese industrial output under the weight of tariffs has slowed to its weakest pace since 2002. The trade war will probably continue for some time, so with strong US data at the end of the week, it was logical that the AUD and NZD fell against the dollar. However, the market is also aware that there is significant tension building again in the Middle East. Iran is suffering under US sanctions and has been condemned for attacking shipping in its offshore waters. The US already has a strong naval presence in the region, and it appears that the next step will to receive naval escorts. Not just from the US, but also from a UN task force. If this situation continues, and Iran shows no willingness to talk, then things could easily escalate. This suggests more JPY strength, and when combined with the US-Chinese trade war, AUDJPY could be weak. We have RBA monetary policy meeting minutes Tuesday, and the RBA bulletin on Thursday. With the oil price jumping higher, as supply is cut, the CAD is a different kettle of fish.