It was a slightly softer week for the Pound after a poor showing for UK data and the Bank of England’s statement. Of note, UK industrial production dropped 0.5% month-on-month versus a forecast of 0.4%, while manufacturing production fell 0.6% month-on-month versus 0.2% forecast.
More pressing, however, was the Sterling weakness following the Bank of England decision due to several factors. First, the 1-7 vote in favour of a hike when many were expecting a 2-6 split. Secondly was the lowering of 2017 growth forecast to 1.9% from 2.0% and thirdly Bank of England Governor Carney focused on the weakness of household spending and GDP following the recent retail sales and GDP data – emphasizing that domestic costs and wages remain subdued.
However, the BoE did stress that tighter policy than the yield curve implies may be needed and that a smooth Brexit could mean more rapid rate rises.
For the week, the pound lost 0.7% against the US Dollar, 0.1% versus the Yen and 0.1% versus the Euro.
French President elect Emmanuel Macron’s easy victory in the French elections last weekend had clearly been priced into markets, and following a modest Euro relief rally, players went about cutting longs and booking some more profit.
Some modestly hawkish comments from current and former ECB policymakers alongside a report in the German press suggesting that the ECB are ready to signal a shift in policy mid-year failed to provide much support to single currency.
We also heard from ECB President Draghi who acknowledged that the Eurozone recovery is becoming increasingly solid but central bank support is still needed to bring inflation back to target level. Thus, market participants will scrutinise the June 8th meeting for signals on winding down stimulus.
The Fed staying pat last week despite a slew of downbeat US data was validated by the much stronger than expected US nonfarm payrolls report the previous Friday. As such, US Dollar bulls were in the driver’s seat at the start of last week, with the USD Index having its best biggest single day gain since early April.
The Greenback continued to outperform its G-10 peers as Federal Reserve speakers stayed on the hawkish path for a June rate hike, but gave back some gains after President Trump’s unconstitutional sacking of FBI director James Comey, raising concerns that he will face more impediment towards implementing his policies.
It was a somewhat mixed week for the Yen, with the Japanese currency initially slipping amidst a decline in Japan’s March labour cash earnings and BOJ Kuroda’s reiteration that further easing is possible if needed, adding that there is still some distance to the price target. However, it erased its losses, on safe-haven demand led by Chinese stock market weakness and renewed political tensions in Washington.
The Australian Dollar gained against most of the major currencies last week as commodities stabilized off recent lows and a modest correction ensued. The Aussie saw a bout of early selling activity after a slump in March building approvals but steadied from there.
It shrugged off China’s trade report, which showed a headline miss for both exports and imports, but slid on the back of the retail sales miss and federal budget announcement after it confirmed a new tax on the country’s four major banks to the tune of AUD 6.2 Bln in a bid to finance infrastructure and health spending.
The Canadian Dollar was mixed against the major currencies last week, gaining as oil prices rose more than 3.0% thanks to a year-to-date record decline in US Crude Inventories.
Ratings agency Moodys downgraded six Canadian banks citing rising household debt and soaring housing prices as a major risk.
NEW ZEALAND DOLLAR
The New Zealand Dollar traded well early in the week as commodities stabilized off recent lows and a modest correction ensued.
The decision by the RBNZ to leave rates unchanged at 1.75% with a dovish bias and saying that the lack of inflation pressures will likely see it keeping rates lower for longer sent the currency crashing lower.
The Swedish Krona was weaker against the major currencies last week, with Riksbank minutes confirming Ingves’ ongoing cautious stance, with concerns over any unwanted Krona strength again being eagerly highlighted offsetting higher than forecast Swedish inflation figures.
The Norwegian Krone rose across the board last week shrugging off weaker than expected Norwegian CPI as oil prices stabilised. Of note, CPI missed forecasts at 0.2% month-on-month versus the 0.5% consensus, leading to a year-on-year drop to 2.2% from 2.4% in Mar and the lowest print since September 2015.
It was a soft week for the Swiss Franc as the French election safe-haven trade continued to unwind. There was little domestic news to work with, leaving the Franc down 1.1% against the US Dollar and 0.5% against the Euro.