Lizzy Birmingham provides a brief roundup of the major FX moves this week, and the drivers behind each.
1) Pound Temporarily Bounces Back after May’s Resignation
Today, British Prime Minister (PM) Theresa May announced her resignation, set for Friday, June 7.
May’s announcement comes after three failed attempts to pass a Brexit deal, confirming mass-speculation surrounding May’s imminent departure due to backlash from her own conservative ministers.
Prior to May’s confirmed resignation, the pound saw immense losses this week. On Thursday, the pound dropped 0.4% to a new 4-1/2 month low of $1.2605. This makes the pound the worst performing major currency in May, losing 3% of its value against the USD.
That being said, following May’s resignation announcement, the pound saw a very slight bounce, gaining back 0.14% of its value against the USD and 0.16% of its value against the euro. These gains are likely temporary, however, as the possibility of a new, no-Deal Brexit PM is now a real threat to the pound.
“Theresa May’s resignation came as no surprise, but the modest support sterling and UK rates have enjoyed since her announcement is somewhat remarkable. We suspect that support will prove temporary. Not only do proponents of a no deal Brexit dominate the list of her likely successors, Parliament has almost no options at its disposal to check any future Prime Minister who wants to leave the European Union without a deal,” says Tim Graf, head of macro strategy EMEA at State Street Global Markets.
2) USD Takes Downturn
On Wednesday, the USD reached a two-year high. These gains came after minutes from the May Federal Open Market Committee meeting revealed that officials agreed to continue patient monetary policy strategies “for some time”.
Yet Thursday saw many of these gains quickly erased, as data revealing weak domestic performance and fallout from the trade war with China increased threats of increased interest rates.
Data from April revealed fewer sales of new US single-family homes and the lowest levels of manufacturing productivity in nearly a decade. This data shocked markets, indicating a dramatic economic downturn may be imminent for the US.
Reuters quotes Marvin Loh, senior global markets strategist at State Street Global Markets, as saying: “There was a lot of discussion today about interest-rate differentials, even in this risk-off environment.”
3) US-China Trade War Spells Disaster for Yuan
Last week, escalating trade tensions between China and the US caused the yuan to depreciate beyond 6.9 to the USD. This week, that dismal number, which marked weakest level since late December, tumbled to a mere 6.9441 to the USD.
The trade war has also hurt the demand for Chinese bonds this year, with monthly inflows averaging at just 6.8 billion yuan ($984 million), starkly contrasting the 44.4 billion yuan average per month seen in 2018, ChinaBond data show.
Amidst China’s poor economic performance, Bloomberg reports that many FX economists, including Sydney-based Nader Naeimi, who sells Chinese equities, have announced they will not resume business with China until economic data significantly improves or the Chinese government announces large fiscal stimulus.
In a statement to Bloomberg, Naeimi, who oversees about $1 billion at AMP Capital Investors, says: “There are a lot of options outside China… It’s two years in a row we’ve seen that – starting well and then a big crash.”
4) German Business Confidence Plummets
On Thursday, reports showed that German business confidence fell to its weakest levels in over four years.
Many other bleak surveys this week have revealed that Germany’s manufacturing sector continues to contract, as new orders are falling, and many of its major industries are seeing their earnings plunge.
Market analysts point to escalating trade tensions worldwide as the cause for Germany’s poor performance. Trump recently announced a delay to tariffs on car imports from the European Union and Japan for 180 days. However, Germany’s auto industry, a major industry in the country, has seen losses in the wake of impending tariffs.
“There is reason to worry, particularly about the manufacturing industry,” president of the Ifo Institute for Economic Research, Clemens Fuest told Bloomberg. That being said, Fuest is cited as saying he expects a temporary increase in consumption to help stabilise the economy.
5) Lira Drops Amidst Threats from US
This week saw major drops in Turkey’s Lira. On Thursday alone, the lira fell to as low as 6.15 against the dollar, approaching its lowest levels since September, 2016.
The drop in Lira value came after a report from CNBC concluded that Turkey has two weeks to cancel plans to buy Russian S-400 missiles. If the country does not cancel the missile purchase, it is set to face severe economic and political penalties from the US, including removal from the F-35 stealth fighter programme, forfeiture of 100 jets, and imposition of US sanctions.
CNBC reported that instead of buying missiles from Russia, Turkey must instead buy a Patriot missile defence system, or face the consequences.
“We underscore that Turkey will face very real and negative consequences if it completes its S-400 delivery,” an anonymous US State Department official is quoted as saying by CNBC.