Good Morning All;
a new monthy currency report. November2016
Last Month’s Highlights
GBP depreciates on “hard” Brexit concerns
ECB stands pat on monetary policy
US, UK Q3 GDP estimates beat expectations
This Month’s Highlights
Fed, BoE interest rate decisions
US Presidential Elections
Second estimates of Q3 GDP
Sterling fell 5.3% against the dollar and 3.1% against the euro over the course of October. Sterling came under renewed pressure around the Conservative Party Conference as Prime Minister May announced that the UK would trigger Article 50 by March 2017 and on investor concern that the UK would pursue a “hard” Brexit. A flash crash during Asian trading hours on Friday 7 October pushed the pound to new lows. Cable registered a low of 1.1841 on Bloomberg, the lowest level since March 1985. The pound recovered much of the ground lost during the flash crash, but not all, and later in the month fell to a new non-crash low of 1.2082 against the dollar. Sterling-euro fell to a post-crash low of around 1.0935.
Other highlights of the month included further gains in the Manufacturing and Services Purchasing Mangers’ Indices and a smaller-than-expected slowdown in economic growth in Q3 to 0.5% from 0.7% in Q2, while annualised growth picked up from 2.1% to 2.3%. Annual CPI inflation rose to 1.0% from 0.6%. BoE Governor Carney testified before the Lords Economic Affairs Committee, reiterating that although the BoE does not target the exchange rate, it is bearing it in mind. On the 31st, BoE Governor Carney announced that he would remain at the BoE through to until 2019, a year longer than initially planned, in order to help in the “orderly transition” of leaving the EU. The pound strengthened on the announcement.
The Bank of England announces its next monetary policy decision on 3 November. It is expected to keep interest rates on hold at 0.25%. Data since its August decision have largely surprised to the upside, as the manufacturing and services indices rebounded more quickly than expected, and economic growth was higher than expected. Those figures, coupled with likely higher projections for inflation and economic growth and the BoE’s reluctance to take interest rates into negative territory, will likely lead the BoE to stand pat for now. That said, Brexit remains a risk to the economic outlook and the pound’s strength going forward, and the BoE could still cut interest rates or expand QE later on. The second estimate of Q3 GDP will be released on 25 November. Any Brexit headlines or further developments will remain the key driver of the pound’s strength in November, likely keeping it relatively under pressure although positive economic releases could offer it some relief.
The euro strengthened leading up to the European Central Bank meeting on speculation that the ECB might be considering tapering QE. The euro fluctuated as the European Central Bank voted to keep interest rates on hold, as expected, and again said that it had not discussed tapering or the extended horizon of QE. The main refinancing rate remains 0.0% and the deposit rate -0.4%. The monthly asset purchase programme continues at €80B through to until at least March of next year. Annual inflation rose from 0.4% in September to 0.5% in October, according to initial estimates, while core CPI inflation remained unchanged at 0.8%. GDP growth was 0.3% quarter-on-quarter and 1.6% year-on-year.
There is no ECB monetary policy meeting in November; the next meeting is the 8th of December. Inflation and economic growth figures will remain closely watched this month ahead of the next central bank meeting as markets contemplate whether the ECB could make a change to QE, possibly expanding the timeline. The second estimate of Q3 Eurozone GDP will be released on 15 November and Final October Eurozone CPI figures will be released on 17 November.
The dollar made gains against both the pound and the euro in October. EUR/USD fell to a seven-month low of 1.0851 towards the end of the month. Dollar strength was largely a result of markets pricing in a Fed rate hike in December and a Clinton victory as Trump suffered following the presidential debates. There was no Fed meeting in October. US politics came under increasing scrutiny throughout the month as the November elections drew closer. The dollar had a relatively muted reaction to an under-forecast September NonFarms, which was nonetheless still strong enough to indicate an improving labour market and keep the door open for a Fed rate hike later in the year. According to CME’s FedWatch Tool heading into the start of November, markets are pricing in a 74% chance of a rate hike in December. Annualised economic growth rose from 1.4% in Q2 to 2.9% in Q3, compared to expectations of 2.7% growth.
The start of the month will be key for the dollar. The Fed announces its latest interest rate decision on 2 November following a two-day meeting. Markets widely expect the Fed to stand pat on interest rates, at least in part given the proximity to the presidential election, and it would come as a surprise should they move on rates this month. October’s jobs report, including the highly traded NonFarms Payrolls, will remain key as the strength of the labour market has been one of the supporting factors for the argument for raising interest rates.
The following week sees the 8 November Presidential election. A Trump victory would likely cause some volatility in markets, particularly in equities, and could prompt a flight to safe havens, including government bonds. A Clinton victory would likely prompt a more muted reaction given that she is a known entity. The uncertainty of a Trump presidency could potentially pose a risk to the dollar’s strength. The second estimate of Q3 GDP will be released on 29 November.