Where others miss the beat, the greenback takes the lead

December 17, 2018


Despite a brief flurry in sterling strength after May won a vote of no confidence, sterling still ended the week near the bottom of the pack after depreciating 1.12% against the dollar. Over the weekend, calls to hold a free vote in the House of Commons to decide the next step in negotiations have emerged. The most notable call comes from Liam Fox, the International Trade Secretary, who has become the first Brexiteer in May’s cabinet to support this idea. May continues to rule out a second referendum, but with pressure mounting prior to the Christmas recess at the end of the week, the likelihood of a vote being put to the Commons is likely. At 14:30 GMT today, the Prime Minister will address lawmakers over last week’s European Council summit.


Dismal French Purchasing Manager Indices spoiled the start of the weekend on Friday for EUR as they came out at a level that indicates a contraction in economic activity, which sent the single currency far south. The Eurozone Composite PMI softened as well, to the lowest point in 2.5 years, indicating economic momentum is definitely not moving in the right direction in Europe. This bad news for the Eurozone economy came just one day after the European Central Bank President Mario Draghi concluded risks for the bloc are “moving to the downside”, making it a week with a strong possibility of further EUR weakness. Today sees the final Consumer Price Index at 10:00 GMT, with on Tuesday the Ifo German Business Climate and on Thursday the Current Account.


Increased “risk off” sentiment, and internal mishaps elsewhere, had the greenback make gains against the entire G10 currency board last week, with strong Retail Sales on Friday being the cherry on top that shortly sent the currency to a 18-month high. It was a roaring good news show with Retail Sales, with the Core figure being strong at a 0.2% growth in November, while the headline measure firm beat expectations at +0.2%. Additionally, October’s readings enjoying significant upwards adjustments on both the core and headline prints. The strong appetite of US consumers to continue spending should strengthen the confidence of the Federal Reserve to pull that infamous hiking lever when they meet this Wednesday, with markets currently pricing in a 72% chance of a further interest rate rise being announced. Rumours of a pause by the Fed in the hiking cycle had gained traction over recent weeks, despite economic and survey data remaining strong. How the Fed will balance this with the risk they increase the rates to the degree that they slow down the economy will therefore be of prime interest, not in the least to get a better view on their rate policy for 2019 and 2020.


The loonie managed to fight off last week’s broad US dollar strength, unlike most of its peers, as crude oil prices saw another week of relative calm after the precipitous falls of the last couple of months. With crude oil prices trading flat for now and expectations of BoC policy at rock bottom, this week’s busy data calendar may offer the loonie an opportunity to rally. Manufacturing Sales will be released on Tuesday, followed by the Consumer Price Index on Wednesday, and Retail Sales and Gross Domestic Product on Friday. Friday will also see the release of the Bank of Canada’s Business Outlook Survey.

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