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November 2016

Weekly Currency Insights from Halo Financial

Published: Monday 28 November 2016

What you may have missed last week and what to watch this week…
 
  • Good news for the UK and the Pound
  • European uncertainty set to continue
  • US Dollar is strong, but how strong is US trade?
  • Positive news for New Zealand doesn’t help NZ Dollar
  • Could Canadian growth and employment figures provide a boost?


Some good news for the UK


Figures released last week show that the Brexit decision has not yet affected the UK economy negatively. Both individuals and companies spent more in Q3 2016, a surprisingly positive result, although growth remained at 0.5 percent, mostly down to trade revenues.

The latest figures from the Office for National Statistics (ONS) show that household spending has risen 0.7 percent from Q2 2016 and business investment has gone up 0.9 percent.

The Confederation of British Industry (CBI) also released a report that supports these findings, showing that retail sales grew at the fastest rate for a year in November 2016.

All this good news has provided a welcome boost for Sterling, which is heading towards its best level against the Euro since 2015 and its best few weeks of strength in eight years, gaining over 5% against the Euro. Although this is still below the pre-referendum rates, market and investor attention is currently moving away from the potential risks for the UK and on to happenings in the Eurozone.
 

Uncertainty in Europe is likely to continue


The Euro remains subdued as traders try to assess the potential threat over the next 12 months and beyond, from the French presidential elections, the Italian constitutional referendum, then elections in Germany and the Netherlands in the months to come. This comes in spite of positive indicators for the German economy going forwards from the IFO institute, in contrast to the country’s slow Q3 – news that had little impact on the Euro.


A strong future for the US Dollar, but how healthy is US trade?


Market commentators are expecting the Federal Reserve to increase interest rates at the next policy meeting on 14th December, with a plan for continued steady increases throughout 2017. This activity is likely to increase the strength of the US Dollar but there are a number of releases this week that will affect sentiment in this regard. This coming week is one where we will hear from lots of speakers and receive releases of only modest levels of data, but the week will finish with the much anticipated US employment report, which will be watched closely by investors and markets.

A boost in sales in recent days mirrored an increase in people buying Black Friday deals, but interestingly, less was spent per head. This in turn essentially reflects the US economy and may go some way to explain why the Federal Reserve has still not decided whether to increase interest rates or not. The US Dollar is enjoying strength in anticipation of an interest rate hike – the US currency will weaken following any dent in that expectation and Tuesday’s release of the Second Estimate of

US Growth data could provide scope for movement in the USD’s rate against its major trading partners.
A recent report showed that the US trade deficit expanded more than was expected in October, from a figure of $56.5 billion in September to $62.0 billion in October. This has led to forecasts that this deficit could grow further, to $59.7 billion. At the same time, the value of imports rose to $184.1 billion, an increase of 1.1 percent. A very strong currency tends to promote imports, so that does make sense.
 

Better than forecast figures for New Zealand


The October and September Trade Balance figures for New Zealand were much better than expected. The deficit was NZ$846 million in October; substantially better than NZ$1.4 billion last month and NZ$905 million in October 2015. However, such is the concern over potential damage caused to New Zealand trade through US President Elect Trump’s proposed abandonment of the Trans-Pacific Trade Partnership, that the NZ Dollar remains at the weaker end of its recent ranges.


Canadian growth and employment to sway the Loonie


Canada also publishes employment data on Friday, which is expected to show no change, or perhaps a very slight difference. However, Canada’s Economic Growth data will be published before that and is expected to show a stronger growth rate and greater growth than August’s figure of 1.3%. This positive outcome could improve the strength of the Canadian Dollar.

Weekly Currency Insight by David Johnson

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