The dollar lost some ground on Friday with the lower home sales data release, which was seen as a key driver. A slowdown in home sales is seen as a red flag for broader economic health and although a full blown recession may still be years off, it has the potential to act as a cautionary note for the Fed in terms of just how relentless they can be in terms of continuing to hike interest rates.
For the next few days, macroeconomic data from the US is relatively thin on the ground. The tempo does increase towards the end of the week with some concern that Thursday’s durable goods order print could see a nosedive, although with political uncertainty prevailing on a global basis right now, the dollars’ safe haven status could prove to be its savior.
Italy is once again the focus when it comes to the Euro’s fortunes in the short term. Rome appears to be spoiling for a fight with Brussels over its budget plans. The new government is continuing to try and deliver on those election promises that were flagged as breaching European Commission rules over deficit management and the matter is set to come to a head in the next few days. Media reports suggest that Italy is expecting to be told it has to revise its budget, while also saying it has no desire to leave the Euro. We can expect a degree of brinksmanship ahead, which will likely heighten volatility for the common currency.
On the economic calendar, Thursday’s monetary policy verdict from the European Central Bank is not expected to see any changes being tabled, although the subsequent press conference will be closely followed. With consumer confidence across the trading bloc slipping, Mario Draghi will need to tread a careful line to not inject panic into the equation.
We saw some support emerging for the Pound in the latter part of Friday’s trade, as hopes rose that Theresa May would drop some of her Brexit demands over the critical Irish border issue. However, her role as head of the ruling Conservative party is once again being thrown into doubt and there is mounting speculation that a leadership challenge could be in the cards. This has the potential for the government to lose its majority which could trigger a general election. This process would bring a huge degree of uncertainty to the table and have the potential to send the Pound lower – at least until a degree of clarity emerges.
Against such a volatile political backdrop, UK macroeconomic data is very thin in the days ahead, although data due for release on Wednesday regarding the number of loans being requested for residential property purchases could provide some indication to how confident consumers feel right now. A sharp dip here may be sufficient to weaken the Sterling.
Economic data at the end of last week threw the Loonie a curve ball after inflation fell sharply. Expectations of 2.7% were met with reality of 2.2%, driving USD/CAD out to six-week highs. The timing of this news is significant, with the Reserve Bank of Canada (RBC) set to meet on Wednesday and markets anticipating a quarter point rate hike. However, the RBC had already said that it expected inflation to return towards the 2% target in early 2019, so the question is whether a move this week risks knocking out economic growth.
In addition, word that Saudi Arabia will not use oil supplies as leverage over any reprimand following the death of the Washington Post journalist has the potential to weigh on the Canadian Dollar. A sharp jump in oil prices would have had the potential to fuel demand for the currency.
There has been some upbeat data out of Australia in the last week, including news that the unemployment rate fell to 5%, a level not seen since early 2012. However, this data has failed to deliver any lasting upside for the Aussie. Even the weekend’s news of tax cuts to boost consumer spending in China have shown to be insufficient in helping to provide any support beyond a short-lived bounce, leaving the downtrend that has been in play for most of the year very much intact.
Even if the economic data looks passable, political woes are likely to impair the Aussie dollar with a weekend by election loss seeing the current coalition government with less than an absolute majority in the Federal Parliament. While it is unlikely to bring down the government, it seems inevitable the progressing legislation will be a bit tougher, something that is unlikely to help the economy in the short term.
The Kiwi found some brief support last week off the back of it’s better than expected inflation reading, which, if sustained could soon find itself back above the key 2% level. Given the challenges facing Australia right now, the NZD could find itself outperforming its Aussie counterpart. The cross already sits close to four-month lows, although it is arguably still too early to start talking about a test of parity for AUD/NZD.
Trade balance data due out later this week from New Zealand, may be poised to provide some support. A deficit contraction of almost 10% is forecast, which is to be welcomed, but anything that suggests the country could be returning to running a surplus is something that has the potential to provide lasting support for the Kiwi.
Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies