FX outlook: Parky’s quick take – 21 September 2020

21 September 2020

Neil ParkerFX Markets Strategist

View bio

Other insights

View more insights

What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.

United Kingdom

Sterling struggles and risk appetite drops amidst lockdown concerns

Last week’s glut of data recorded some improvements in the UK economy, with the HMRC payroll data for August and retail figures for the same month reporting growth in employment and sales volumes.

The consumer price inflation data also rose by more than was expected in the year to August, with the pass through effect of the VAT cut for the hospitality sector, and the eat out to help out scheme having a smaller negative effect than anticipated. The Bank of England was briefed on the effectiveness of negative rates, should they become necessary, which some saw as a nod towards additional loosening at some point later this year, or in early 2021.

This week sees August public finances data and the preliminary September manufacturing and services PMIs (Purchasing Managers’ Index) released. These are the two most important releases. PMIs are expected to show some pull back, and the public finances are likely to record a rise in the deficit, as the government subsidised eating out and cut VAT for the retail and services sector. There will also be interest in the GfK (Growth from Knowledge) consumer confidence survey for September, released on Friday.

Has the resurgence in coronavirus cases harmed confidence? The pound continues to struggle. Both sides in the UK/EU trade negotiations last week tried to claim some movement from the other side regarding fishing rights. We are still some way from any agreement being made, and that could keep the GBP under pressure.

Europe

Markets fret as fears of a second lockdown in Europe increase

Europe is concerned by the trend in the coronavirus cases. In France we saw new highs over the weekend (almost 13,500), in Germany last Friday we saw the highest number of new cases in almost 5 months, and cases are rising across Portugal and other parts of Europe. The only positive is that in Spain, where cases had increased sharply, the data suggests that new cases have dropped back in the last week or two. So will Europe feel the need for a renewed lockdown, or will they introduce tougher regional restrictions where new outbreaks have sprung up? Will this have a negative effect on economic activity and could it prompt additional action from the European Central Bank and/or fiscal authorities?

As we head into the Autumn, any increased risk of lockdown could undermine the retail sector in its most important period, further damaging fiscal balance sheets. Will the ECB (European Central Bank) look to act pre-emptively to mitigate this?

This week’s data calendar is fairly light, but there will be plenty of interest in the preliminary September Euroland PMIs released on Wednesday and German IFO (Information and Forschung / Germany’s Institute for Economic Research) business climate index figures for September on Thursday. These figures could show a pull-back in activity in September, according to the PMIs, but a rebound in confidence and current conditions in the IFO readings. The news is unlikely to improve much even on the latter, with localised increases in restrictions likely to affect the performance of some of the major economies in the short term. The performance of the EUR could be negatively affected by this as well, having dropped in the early stages of the week. Will it hold at previous supports versus the USD?  

United States

Data uneventful as US election race heats up

The Federal Reserve’s meeting and monetary policy decision last week left policy unchanged, as expected. The Fed also released its latest dot plots, which showed it intended to keep interest rates on hold until at least the end of 2023, and suggested that interest rates would only increase or monetary policy tightened once inflation had reached 2% and was likely to exceed that for a prolonged period. That outlined the Fed’s new policy guidelines, but it wasn’t particularly well received by the markets, with the equity markets selling off yet again. The data and surveys were a mixed bag as well, showing some improvement in the US economy generally, but nothing to indicate a faster pace of recovery was on the way.

There were reports of a possible breakthrough in stimulus negotiations, after a comment from US President Trump, who seemed inclined to support a new bi-partisan stimulus package worth around $1.5 trillion. There was caution amongst Republicans in the Senate however, who were far from impressed with the new measures and their cost.

This week sees little of note in terms of the US data and surveys. Existing and new home sales figures for August aren’t likely to offer much new information, the preliminary September manufacturing and services PMIs are expected to continue to show the US doing better than Euroland, but worse than the UK, and latest week jobless data is forecast to record a further modest improvement.

There are a plethora of speeches however, with Powell appearing before the House Financial Services Panel and the Senate Banking Committee, whilst Brainard, Evans, Barkin, Mester, Rosengren, Quarles, Daly and Williams are all due to speak throughout the course of the week.

There are clearly concerns about the prospect of a further delay to the global recovery, but is the Fed unsure about what the next step should be? For the USD, it is not clear that it has yet stabilised, and the prospect of additional monetary loosening could still add short term pressure to it.

Rest of the world

Many meetings this week, but unlikely scope for further easing

Last week saw no movement from any of the central banks, but there was no expectation of any change. The only doubt was the South African Reserve Bank which markets thought would cut interest rates, but it always looked a marginal call with only 9 out of 17 surveyed predicting a cut. This week sees the Riksbank meet on Tuesday, but with rates at zero, it is unlikely any conventional easing will be sanctioned, and a strengthening in the economy (better labour market, confidence and GDP (Gross Domestic Product) figures) should preclude any unconventional easing either.

The Reserve Bank of New Zealand meets early on Wednesday, and is also not expected to alter policy. The recent publication of stress tests indicated that domestic banks required additional capital buffers to protect them against economic shocks, vindicating the RBNZ’s (Royal Bank of New Zealand) decision to raise the requirements at the end of last year. However, the downturn to the NZ economy, deterioration in China relations, and repeated return to tighter restrictions could slow the recovery, requiring prolonged ultra-loose monetary policy, or more loosening from here.

Later on Wednesday the Thai central bank meet, and there should be no change to policy there. Early on Thursday we have the SNB (Swiss National Bank) and the Norges Bank decisions, with neither of those expected to loosen either. The SNB have repeated concerns over the strength of the Swiss franc, and further verbal interventions are likely in the run up to year end, if it retains its strength. As for the Norges Bank, they may even be marginally more hawkish in terms of the outlook for interest rates, which could offer support to the NOK.

The Turkish and Mexican central banks also meet on Thursday and both of these have scope to cut if deemed necessary, but with both having cut aggressively over the past year, and with real rates significantly negative in Turkey, room for additional loosening is limited. However, shaving 25 basis points from rates by both central banks wouldn’t hurt or undermine the lira or peso.

Finally, on Friday, the central banks of Colombia and Trinidad and Tobago meet. Again there is limited scope for rate cuts, with Colombia likely to cut to 1.75% from 2%, but no change from Trinidad and Tobago.

To read the previous quick take, click here

Access more FX insights on the FX hub Markets Insights hub.

FX
Markets
Economy


This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright 2020 © NatWest Markets Plc. All rights reserved.