Market News – 21 August 2017

Sterling was one of the weakest G10 currencies last week. Inflation figures released on Tuesday provided a notable weight after CPI came in a touch softer than expected at 2.6% against a forecast of 2.7%.

The pound then failed to derive much support from the stronger average earning figures released on Wednesday. Brexit developments were also in focus with conflicting reports as to whether sufficient progress will have been made in negotiations before the end of the year.

The pound’s net short (bet’s against) rose to the highest since late June with an increase to 31,860 contracts from a prior 26,160. Speculators added to both long and short contracts and despite a net build to the short side, the gross long has risen to a size that can be considered extreme.

For the week, the pound lost 1.1% versus the US Dollar, 0.5% versus the Euro and 1.1% versus the Yen.

A mixed week for the Euro although bias was to the downside with the single currency falling on two separate ECB related stories. First on Wednesday, a sources report suggested Mario Draghi would unveil a new policy stance in his Jackson Hole speech this week. This was followed by the ECB minutes on Thursday where concerns were expressed about a possible overshooting in the repricing by financial markets, notably the foreign exchange markets.

The largest shift was seen in euro positioning as the net long dropped from 93,665 contracts to 79,267. Last week, the position rose to a fresh six-year high. This week it has fallen to a six-week low. Nevertheless, the position remains at an extreme, putting the euro at risk of further long covering.

Data wise, Euro Zone CPI was unrevised from the flash readings while Q2 GDP was nudged up to 2.2% from 2.1% – both releases prompted minimal reaction.

The Dollar Index posted a modest gain last week although this failed to tell the whole picture as the Greenback logged a weekly loss against the majority of G10 currencies.

The Dollar started the week on the front foot supported by a robust retail sales report and remarks from New York Fed Governor Dudley who advocated another rate increase this year.

Gains were trimmed towards the end of the week however following the FOMC minutes and increased political uncertainty as rumours spread that Gary Cohn was to resign as director of the National Economic Council. Mr Cohn, a former executive at Goldman Sachs and the White House chief economic adviser, is said to have been deeply dismayed by the president’s response to the white nationalist rallies in Virginia.

The Japanese Yen was mostly higher last week, supported by safe-haven flows following the terrorist attack in Barcelona and increased political uncertainty in the US.

The Yen began the week on the back foot however and fell on Monday and Tuesday despite a stellar GDP report for the second-quarter.

The Australian Dollar was one of the stronger G10 currencies last week although began the week on the back foot following some soft Chinese macro releases and a sharp fall in crude prices on Monday.

The RBA minutes on Tuesday provided little for AUD bulls to cheer about as they warned of the disinflationary impact of a strong currency and took note of a potential economic slowdown if the AUD extends the rally.

The employment report on Wednesday was mixed with employment rising faster than expected but a steep drop in full-time employment.

The Canadian Dollar was one of the stronger G10 currencies last week. The bulk of gains came on Friday after CPI figures were released – headline CPI rose to 1.2% year-on-year from 1.0% previously.

Oil prices also rebounded on Friday although still posted a weekly loss of around 0.8% and this will have provided a weight.

Oil prices provided a weight early last week, but the Krone saw its largest gain on Friday where oil prices saw a healthy retracement. Domestic impulses were limited with the trade surplus coming in at 14.3 Billion on Monday.

The Swiss Franc was mixed last week. Safe haven flows provided some support following the terrorist attack in Barcelona and increased political uncertainty in the US.

PPI figures released on Monday were on the soft side but failed to prompt much reaction.