Post date: 03/09/2018 08:00
Contagion fears again ruled currency markets last week. The Turkish Lira headed down again as Turkish markets reopened after a long holiday. By the middle of the week, the Argentine peso crashed after the country asked the IMF to accelerate the disbursement of the aid package. Latin American currencies particular bore the brunt of the sell off, though the Brazilian real managed a decent rebound after central bank intervention.
G10 currencies largely sat out the drama, save for the Swiss franc, up on ssafe haven flows, and the Australian dollar, which suffered after domestic banks announced increases in mortgage rates.
Economic data returns with a vengeance this week in the US. The jobs report for August, out on Friday, will re Parliceive most of the attention but trade deficit and ISM data are also important. The Italian budget to be published this week will be key measure of the Government's appetite for confrontation with EU institutions.
Sterling began what we expect to be a significant short covering rally last Wednesday, after EU negotiator Barnier promised an "unprecedented partnership" with the UK. Parliament returns to Brexit discussion this week. Any further positive news from the Brexit negotiations and strong prints in the PMI indices of business activity out Monday and Tuesday may push Sterling further, as current levels are pricing in something close to a hard Brexit scenario.
We saw mixed data out of the Eurozone last week. Strong IFO investor survey in Germany Monday buoyed the common currency, but another disappointing inflation print knocked it back to roughly where it had started the week. We are still forecasting a first ECB hike in the summer of 2019, but unless core inflation starts showing a clear upward trend towards the ECB target we will have to delay our call until the last quarter of the year.
We will now mark time until the ECB September meeting by scrutinizing the first budget drawn up by Italy's right populist coalition. As this is written, there are signs that the 3% deficit limit will be respected which should provide some support to the Euro.
With little in the way of domestic news to guide it, the US dollar benefited from risk aversion flows as investors were spooked by the sharp falls in the Argentine peso and the Turkish Lira. The greenback gained against emerging market currencies generally but within G10 currencies it ended the week near the middle of the table. After the Monday holiday, this week will provide plenty of information for the Federal Reserve to fine tune its policy. Particularly important will be Friday's payroll number. Consensus expect the annual wage increase number to print at 2.7% for the third consecutive month. Any positive surprise would probably send the dollar back towards the high end of recent trading ranges.