FX outlook: Parky’s quick take – 28 September 2020

28 September 2020

Neil ParkerFX Markets Strategist

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

United Kingdom

Sterling rises amid market optimism for trade talks  

The Chancellor’s announcement of additional fiscal support for employers and the self–employed came as the government announced a further tightening of restrictions on social distancing and a widening of localised restrictions. His additional support measures were worth far less than those previously in place, but will add an additional burden onto government borrowing and mean further debt issuance will be required. That increases the risks of additional quantitative easing from the Bank of England, if only slightly, since additional government bond issuance could prompt an increase in yields across the curve. That would prove counterproductive in terms of getting UK economy output back to pre-crisis levels as quickly as possible.

BoE (Bank of England) member Tenreyro gave an interview to the Telegraph over the weekend, and she indicated that most of the technical work so far had been encouraging, in regard to negative interest rates. The pound enjoyed some constructive moves towards the end of last week, but ended the week sharply lower against the US dollar.

This week sees little important data due. The UK credit figures on Tuesday and the final September manufacturing PMI (Purchasing Managers’ Index) survey on Thursday will likely be window dressing to more important events in the UK and elsewhere.

Notably, the resumption of trade talks between the UK and Europe has seen the market begin the week in a more confident mood. There is an air of expectation about a possible compromise solution, although we’ve seen this before and been subsequently disappointed. If no breakthrough on trade is agreed at this round of talks, then things will likely go down to the wire between the two sides, with the deadline of the end of October for talks to conclude more likely to slip into November. Market optimism towards Brexit aside, the UK economy looks as if the recovery could take longer, and therefore require additional fiscal and monetary support in the months and quarters to come.

Europe

Inflation data and country based unemployment figures in focus

Data and surveys out of the Eurozone were in short supply last week, but those which were released were still of interest to markets, and painted a conflicting picture. The German IFO (Information and Forschung / Germany’s Institute for Economic Research) survey reported some improvement in the overall business climate in September, but not as much as expected, whilst the Euroland manufacturing and services PMIs showed a very different picture between the two sectors. In the provisional September figures, manufacturing activity rose but services activity slumped. Increasing infection rates and renewed localised lockdowns were likely responsible for the downturn in services, and means that the rebound in activity might take longer to fully recoup the lost output seen in recent quarters.

This week sees unemployment and inflation figures for August released from Euroland. Realistically, these should not record much difference in the rates of inflation and will record a worsening in labour market conditions. The Euroland economy will be in need of additional stimulus at some point, and in comparison to the measures undertaken by the US and UK governments, the stimulus/support offered by European governments has been far less significant. The European Central Bank may have to consider further creativity in terms of the policy stance, if there is no extra support from governments ahead of year end. The EUR, in the face of the downturn in parts of the economy, could also give back quite a lot of gains made over recent months as well.  

United States

US election debate in focus after Trump’s tax returns leaked

Last week saw the US dollar make some good gains against other majors. What drove this? The increase in COVID infections in Europe led to a reduction in risk appetite, and a new political disagreement in US politics, after the death of a Supreme Court Justice, reduced the risks of a bi-partisan deal on further fiscal stimulus. The dollar’s gains extended across other safe-haven currencies, pointing to a more general reduction in risk appetite. The testimony from Jerome Powell to committees from both Houses of government painted a picture of ongoing asymmetric negative risks to the US economy, but also one that could not be solved by monetary policy alone. Market focus remains on stimulus measures, but both the Treasury and Federal Reserve may now sit on the sidelines ahead of the November 3rd Presidential election.

Tuesday’s Presidential election debate is likely to be closely watched by the markets. Trump, trailing in the polls just like he was in 2016, will be hoping to land a few blows against his rival, Joe Biden, regarding his policies, or indeed his competence. The election will be won and lost in the swing states across the rust belt, the Carolinas and Florida, where Trump surged to victory in the 2016 vote. However, Trump’s chances in the debate may have been dealt a blow after the New York Times released the details of two decades of his tax returns. It is likely that these will either come up in the moderator’s questions, or Biden may capitalise on this.

On the data front, this week is all about the September non-farm payrolls release on Friday. This is expected to record a further 850k+ increase in net payrolls, prompting an additional fall in the unemployment rate. The pace of job creation looks to be slowing. Will this have a negative or positive effect on market sentiment, and will it enhance the risks of additional monetary and fiscal loosening?

Rest of the world

Focus on India, as strong rupee means potential loosening

Last week was meant to be uneventful. Sure there were at least a couple of central banks that had scope to cut interest rates, but that was broadly built in. What wasn’t expected was the decision by the Turkish central bank to hike their official rates by 200 basis points. The decision was justified by the central bank concerns over high current inflation along with expectations of further persistent high inflation. They also warned of additional tightening to come, to continue the ‘disinflation process’.

Elsewhere there was a modest dovish surprise from the Norges Bank, who lowered their long term interest rate expectation, and the central banks of Nigeria, Mexico and Egypt all cut interest rates, by 100, 25 and 50 basis points respectively.

This week sees the central banks of the Dominican Republic, India and the Philippines set to decide on monetary policy. The markets might have been confidently expecting both to leave monetary policy unchanged, but that confidence could have been shaken by developments recently. Interest rates have already fallen in both countries by 150 and 115 basis points respectively.

There’s room for additional loosening, but significant currency weakness in the Dominican Republic since the beginning of the year makes another cut unlikely. The Indian Rupee has shown little weakness over the course of the year, making a cut from the Reserve Bank of India more likely, especially in the face of continued pandemic-driven economic pressures which have already seen growth drop by almost 24% year on year in Q2 2020. That being said, this is perhaps not the month for the RBoI (Royal Bank of India) to alter their stance. No change is expected from the Philippines also, and there is also risk of a cut, especially with the peso maintaining its recent strength.

To read the previous quick take, click here

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