USD: Dollar’s not done
dominated proceedings yesterday, pushing to a 3 month high on a trade weighted basis with particular gains seen against sterling, the euro, the Australian dollar and the NZ dollar. How much further the dollar has to run largely revolves around what happens in US debt markets. Despite a decent run at it yesterday, the interest rate on US government debt due to be repaid in 10 years’ time didn’t breach the 3% level but it does seem only a matter of time until that level is passed and dollar gets another leg higher.
Of course, political risk remains around the US dollar with everything from China trade, Stormy Daniels, Facebook, the Mueller investigation and North Korea having the ability to stop the greenback in its tracks.
Dollar sellers, depending on the cross that they are selling into, are getting rates that are surprisingly strong at the moment and we are never ones to look a gift horse in the mouth.
EUR: PMI weakness unlikely to sway ECB thoughts on Thursday
The focus increases on the single currency this week ahead of Thursday’s European Central Bank meeting. Yesterday’s preliminary manufacturing PMI for the Eurozone declined more-than-expected to 56 in April, a 17-month low. Total goods and export orders were the lowest since the end of 2016, ostensibly as a result of the weaker dollar against the euro.
These numbers are unlikely to influence much of the European Central Bank’s thinking on Thursday and we remain confident that Mario Draghi and the rest of the Executive Board will keep the market on track for an end to the Bank’s quantitative easing plan in Q3 of this year. We would not be surprised if the tone of the meeting is somewhat downcast on inflation and trade however, and that may be enough to keep EUR on the back foot.
French President Macron is in Washington on a state visit to the US in his role as the EU’s foremost Trump Whisperer.
AUD: Not helped by inflation miss
AUD has fallen to its lowest level of the year against the USD this morning – it’s down over 2% in the past three days. While a lot of the weakness has come from falls in commodity prices such as copper and iron, the overnight run of inflation in the first quarter of the year also disappointed.
Headline inflation on both the quarter and the year missed expectations at 0.4% and 1.9% respectively and the Reserve Bank of Australia’s preferred measure of price rises only hit 2%. The RBA has a target range of 2-3% and therefore while within the range, it is only just, and hence our belief that the Reserve Bank of Australia does not hike interest rates until next year.
GBP: Doubts on May keeping the pound under pressure
Sterling had a tough day yesterday against the USD – much like everyone else! Bank of England Governor Carney’s comments on interest rates and doubts around the May meeting are still ringing in a lot of investors’ ears and hence the reticence to buy back sterling yet. This Friday’s GDP report carries a lot more weight now than it used to in light of these comments.
Have a great day.
Jeremy Cook, Chief Economist
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