CURRENCY NEWS CENTRE

Transcription

1 CURRENCY NEWS CENTRE

2 Introduction When the riyal rises against the pound or the dirham dives, there is just one force at work: the exchange rate between sterling and the dollar. For more than a generation, the currencies of oil-producing states in the Arabian Peninsula have been linked to the US currency. If the pound gets cheaper against the dollar it becomes weaker against the riyal, the dinar, and the dirham too. Following the Brexit referendum, the pound dropped by around 20%, but 2017 has seen it recover some ground against the US dollar and the Gulf currencies; Q3 even saw GBP/USD break through the 1.35 key technical level.

3 Gulf Currencies and their market links Gulf Cooperation Council When the Gulf Cooperation Council (GCC) was founded in 1981 one of its stated objectives was the establishment of a common currency. The idea was that instead of each country pegging its currency individually to the US dollar, they would join forces and create one that could be used by all member states. The project got nowhere and, with the withdrawal of the United Arab Emirates (UAE) in 2009, has been abandoned for all practical purposes. Dollar link In the absence of a common currency, GCC states continue to operate, individually, the same currency regimes that have been in place since the 1970s; in one way or another they are pegged to the US dollar. The pegs are in recognition that the primary wealth of the region is oil, which is priced in US dollars. They are also quite robust. Whilst there have been adjustments along the way, and although the Kuwait dinar is in theory pegged to a basket of currencies, not just the dollar, in practice it is reasonable to treat all GCC currencies as clones of the dollar. Where it goes, they go. In round figures, one US dollar buys 3.67 UAE dirhams, 3.75 Saudi riyals, 3.64 Qatari riyals, 0.38 Omani riyals, 0.37 Bahraini riyals, or 0.30 Kuwaiti dinars. Those exchange rates have not changed in more than 30 years. The only one that moves at all is the Kuwaiti dinar. Its value is set by the central bank according to a dollar-heavy basket of currencies. In quarter three, the Kuwaiti dinar reached a high of versus the US dollar, and a low of Politics and GBP/USD It has been quite a quarter and it looks as if the final part of the year could bring with it some more interesting developments to keep markets guessing. Central banks have surprised markets and hiked rates, some for the first time since the Global Financial Crisis (GFC), and geopolitical tensions have created some dramatic currency shifts. Meanwhile, political developments the world over have caused instability, such as New Zealand s unclear election, Germany s unexpected rise of the right-wing, a snap election in Japan, a crisis in Catalonia, and shaky politics in both the US and Britain. Q3 saw the pound in particular make some sharp shifts; rising like a phoenix from the depths of 1.07 when parity predictions were shrouding the market, back to levels of around Similarly, with the US dollar, the pound managed to break through a key psychological barrier of 1.35 a post-brexit vote high. Expectations for the final quarter of the year are high, with many forecasting several central banks to increase interest rates before we wave goodbye to However, with North Korea and the US on the verge of butting heads, missiles flying over Japan, and a constant back and forth between the UK and European Union and seemingly very little progress made in Brexit talks, it s likely to be a rocky road out of the year.

4 GBP - Pound sterling Interest rates and central bankers The topic of higher interest rates is one of the market s favourites, will the Bank of England (BoE) finally bring rates higher for the first time since the Global Financial Crisis? Or will they leave them low for longer and let markets speculate? Following the Brexit vote last year, the BoE had to lower interest rates to 0.25%, but in recent months, inflation has been climbing and central bankers have hinted that pushing the bank rate higher could be a good thing. BoE Governor Mark Carney probably has the most sway over the pound when it comes to discussing interest rates, and while comments for and against have been thrown around in the past quarter, Carney ended Q3 by saying the central bank was close to hiking rates in its November meeting. Carney suggested: If the economy continues on the track that it s been on, and all indications are that it is, in the relatively near-term, we can expect that interest rates would increase somewhat. If the BoE does indeed raise rates, it s likely that the pound will gain. Brexit boredom Markets are getting bored of hearing the same news from Brexit; whether it s the back and forth quips between Britain and EU heads that suggest the UK hasn t done enough to move on to trade talks, or Theresa May s speeches which reveal little new info, Brexit fluctuations are less of a constant influencer in comparison to other factors, like interest rates. That s not to say sterling hasn t fluctuated in some dramatic moves from Brexit related issues or comments, but markets seem to be focusing on the bigger picture until some new information from Brexit breaks. Instead, investors seem to be placing their focus on how inflation and UK growth is performing, and how that might transform into higher interest rates. Perhaps the most dramatic Brexit inspired GBP movement in the last quarter came when the EU Chief negotiator Michel Barnier told the UK to speed up and get serious sterling fell to Credit rating The UK received a credit downgrade from Moody s Analytics as some had expected. Moody s adjusted Britain s rating from Aa1 to Aa2 Britain s lowest ever credit rating. The ratings agency stated that it had concerns over the impact of Brexit on the British economy. The move came after Theresa May s Florence speech which confirmed the UK would be leaving the European Single Market. The government hit back at Moody s saying that its verdict was outdated, and Moody s provided a rebuttal, which created a public spat between the institutions that did little favours for sterling.

5 USD - US dollar North Korea Geopolitical tensions emanating from North Korea have created market movement a number of times in the past quarter, and tensions have been close to boiling over on a few occasions, perhaps most notably when North Korea announced the US had declared war. By the end of Q3, US Secretary of State Rex Tillerson had stated that Washington had been probing the possibility of talks with Pyongyang, and suggested people stay tuned. Tillerson continued: We have lines of communications to Pyongyang. We re not in a dark situation. However, the US state department confirmed that multiple communication channels were open, but that little progress had been achieved. One department spokeswoman, Heather Nauert, commented: Despite assurance that the United States is not interested in promoting the collapse of the current regime North Korean officials have shown no indication that they are interested in or are ready for talks regarding denuclearisation. The United Nations has brought in sanctions designed to put pressure on the secretive nation. Rates, rates, rates Quarter three saw lots of back and forth on the topic of interest rates but as the quarter came to a close, Fed Chief Janet Yellen iterated that she supported higher interest levels. Markets moved on the news and many investors expect the Federal Reserve will hike rates once more this year if data continues to be positive. Q4 saw the release of the US Institute for Supply Management (ISM) manufacturing purchasing managers index (PMI) jump to 60.8 the fastest pace of expansion in 13 years.

6 Looking ahead to the fourth quarter of 2017 Issues which could affect the UK economy Inflation expectations The start of September brought with it the news that consumer prices had spiked to 2.9% in August from the previous month s 2.6%. Core inflation reached 2.7%, the highest level since The ecostats allowed the pound to US dollar (GBP/USD) exchange rate, also known as cable, to jump to a one-year high at 1.32, and in the weeks that followed managed to attain October brought with it September s reading which saw inflation reach a five-year high of 3.0%. Inflation readings are likely to create shifts in the pound; a fall in consumer prices could see sterling drop. Political sway Politics look set to be an interesting aspect of the pound s fluctuations in Q4 with unruly Boris Johnson undermining Theresa May at every turn, the possibility of a cabinet reshuffle, rumours of a coup and new leadership election, and little progress being made in Brexit negotiations. Additionally, the November Bank of England meeting is likely to be a source of sterling movement, as investors attempt to price in whether or not the BoE will increase rates. As always, Britain s gross domestic product (GDP) growth figures will be closely watched as markets try to determine the impact Brexit has had on the economy thus far.

7 Looking ahead to the fourth quarter of 2017 Issues which could affect the US economy Tax reforms Trump s promise of tax reforms progressed in quarter three when the US President announced his plans. However, these reforms still have the be approved, and if the history of Trump s Presidency tells us anything, it s that it s unlikely they will pass through without a hitch. A Fed shakeup? Federal Reserve Chair Janet Yellen may not hold the position much longer as Donald Trump decides who to appoint before Yellen s term expires on February It s reported that Kevin Warsh, Jerome Powell, Gary Cohen, and Janet Yellen have all so far met with Trump and he s stated his decision will be made in coming weeks. Warsh is a hawkish former Fed Governor with a distaste for quantitative easing, and his election would likely see the US dollar gain. Politics The situation between the US and North Korea could continue to create sharp US dollar movements, especially if any rash decisions are made. President Donald Trump stated in Q2 that talking is not the answer. Federal Reserve developments are also likely to be major factors in USD exchange rate movement, if the Fed hikes rates the US dollar is expected to rally, and if a hawkish Chair is chosen, the USD could have another reason to rise.