Post date: 26/11/2018 08:00
Financial markets worldwide continued to sell off during the US Thanksgiving holiday. In the absence of any major monetary or economic news, currency markets took their cue from other risk assets and reacted according to script. Commodity currencies like the Australian and New Zealand dollars and the Norwegian Krona suffered the most, while the dollar rose against every other G10 currency save the safe havens, the Japanese Yen and the Swiss Franc. The commodity sell off also drove emerging market performance, with oil importers like Turkey outperforming commodity exporters, particularly in Latin America.
Next week the focus in currency markets should remain entirely on political developments. The debate leading up to the UK Parliament vote on the Brexit deal agreed to by the EU and Prime Minister May will be key, but also the G20 meeting over next weekend, as well as any developments in the standoff between the Italian Government and the European Commission over the former's budget.
Economic news are being all but ignored by markets as we get closer to the Brexit moment of truth. With the final draft agreement between Prime Minister Nay and the European Union finalized over the weekend, the drama switches now to the UK Parliament. Bookmakers put the odds of passage at slightly less than even, but the truth is nobody knows. Sterling took the news of the agreement Sunday in stride, as it awaits the outcome of the vote. With little key news on tap out of the UK, Sterling will spend the next few weeks focused on the tallying up of votes for and against the agreement.
The Euro managed to keep its losses against the dollar to a respectable level last week. Considering the bleak news out of the Eurozone, this was no small achievement. The key PMI indices of business activity weakened yet again. The Composite index hit a 47-month low at 52.4, still signalling expansion, but confirming a worrisome loss of momentum. This, together with the lack of signs of any pickup in inflation, means that our call for a first ECB hike in the third quarter of 2019 is at risk. Unless we see a meaningful rebound in these in December, we will be pushing our forecast further into the future, and our forecast for Euro levels downwards.
As is often the case in the Thanksgiving holiday week, the dollar mostly traded off events elsewhere. General market nervousness pushed it somewhat higher for the week. This week should be little different. The main event will be the publication of the minutes from the last meeting of the Federal Reserve on Wednesday. Markets have taken out all but one of the rate hikes that were priced in for 2019, and there will be keen interest in finding out whether the Fed's rhetoric justifies this softening.