Post date: 15/10/2018 08:00

Last week saw some unusual moves in currency markets. The relentless sell off in equities worldwide and rising risk aversion did not benefit the US dollar, which fell against every G10 currency save the Canadian dollar, and even more unusually, against most emerging market currencies outside the Pacific rim. The Yen predictably benefited from market nervousness as a safe haven, but so did the Turkish Lira, the South African Rand, and the Brazilian Real, all of them buoyed by market-friendly political developments.

In the absence of key macroeconomic or monetary news this week, we expect markets to remain focused on the interaction between US interest rates, risk assets, and currencies. The unusual divergence between the US dollar and higher US rates, if confirmed over the next few weeks, would be a critical development.


Sterling was buoyed last week by hopeful rumours from the Brexit negotiations. However, as this is written the Pound is giving up all its weekly gains in early Monday Asian trading as news that the UK and the European Union were about to miss a key deadline, after the negotiations ended in deadlock over the weekend. In addition to the Brexit negotiations, wage data out on Tuesday and UK inflation on Wednesday will add key information to predict the timetable for Bank of England rate hikes.


Eurozone economic developments continue to be overshadowed by the conflict over the right-populist Italian government and its plans to ignore Brussels budget deficit guidelines. However it is worth noting that industrial production numbers came out much stronger than expected, and there is little sign of a slowdown in recent economic releases. Nevertheless, the Italian impasse could prove negative for the common currency, ahead of the October 15th deadline for Italy to send its budget to the European Commission.


The inability of the US dollar to rally in spite of the general flight from risk and stock market selloff was remarkable. The more so because US rates really did not fall nearly as much as one would have expected given the falls in equities and also the sharp disappointment in September inflation data out of the US. The latter showed a dramatic fall in headline inflation from 2.7% all the way to 2.3%, and a less dramatic but possibly more meaningful 0.1% downward surprise in core inflation.

Retail sales on Monday will provide the main macroeconomic reference this week, but even more important will be to monitor whether the US dollar continues to ignore high US rates and rising risk aversion and fails to rally.