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UK
Currency Outlook
August 2020
afex.com | © 2020 Associated Foreign Exchange, Inc. All rights reserved.CURRENCY OUTLOOKGBP
LOOKING BACK TO JULY
Last month we suggested that sterling would be more prone to
UK £ EVENTS, AUGUST 2020
being affected by other currency themes as it lost its current level
of access to the European Union. This was the case for July as the
market took flight from the US dollar and GBPUSD benefitted by • Manufacturing PMI
gaining nearly 4%. Bank of England economist Haldane helped
a touch as he said that the UK was rebounding ‘sooner and MONDAY | AUGUST 3
faster’ than expected. Prime Minister Johnson also announced a
spending plan totalling GBP 5 billion, although there are some
doubts as to this amount being all ‘new investments.’ Chancellor • Services PMI
Sunak followed this up with a host of stimulatory measures GBPUSD/Source: Bloomberg
totalling GBP 30 billion. They included a job retention scheme, WEDNESDAY | AUGUST 5
a ‘kick-start’ scheme encouraging employment of 16-24-year AUGUST EVENTS, OPPORTUNITIES • Bank of England Interest rate
olds, a reduction to zero for stamp duty on houses worth up to
GBP 500k and a time limited VAT cut for the leisure industry
AND RISKS decision
from 20% to 5% and eat out vouchers. The market liked his While the US dollar is sliding, sterling is being buoyed against • Inflation report
ideas, but sterling took a knock later when June GDP only rose the greenback. It is also just about managing to hold its ground • Construction PMI
by 1.8% after a decline of 20.8% in May. The Office for Budget against the euro. On closer inspection of the eurozone economy • GDP/Manufacturing
Responsibility released possible scenarios for the UK economy, and the UK economy, this is surprising. As mentioned previously,
THURSDAY | AUGUST 6 production
which included a decline in GDP for 2020 of 12.4%, a budget the UK economy is forecast to decline by 12.4% this year while • Construction output
deficit of GBP 322 billion and unemployment rate of 8.8% this the ECB forecasts Eurozone GDP will decline by 8.3%. The EU
year and 10% in 2021. This GBPUSD weakness was short lived has also announced a debt sharing stimulus package of euro
• Goods trade balance
as the pandemic aggressively grew in the US. 750 billion, which is very important. So why is GBPEUR not • Industrial production
weakening? From our expertise, there are two suspects. Firstly, • Average earnings MONDAY | AUGUST 10
Brexit and the timetable for the UK/EU trade talks. Currently, • Unemployment rate
BASE RATE talks are not being conducted although they recommence
0.1% on August 17th. There are two sticking points. Fish and the
‘level playing field,’ where the EU wants assurances that the
UK government will not support its industry unfairly against EU
• Claimant count change
TUESDAY | AUGUST 11
GDP competition. It is possible that these issues will be resolved as • CPI
-1.7% YoY the EU and UK are expected to enter the ‘tunnel’ of negotiations
in September. Agreement needs to be gained before the end
of October so that the terms can be ratified by individual EU
WEDNESDAY | AUGUST 19
CPI
UK £ FUNDAMENTAL DATA
parliaments. The second suspect is the Swiss National Bank.
+0.6% YoY BDSwiss group have analysed the SNB’s huge intervention in
EURCHF and calculated that to rebalance their portfolio the
SNB would need to buy GBP 4.56 billion by selling euro’s
• Retail sales
THURSDAY | AUGUST 20
UNEMPLOYMENT they have bought against the CHF. The SNB is in danger of
3.9%
being labelled a currency manipulator by the US. If they were
to halt or even reduce their intervention at the same time as • Consumer confidence
there is uncertainty over the UK/EU trade talks GBPEUR could
FRIDAY | AUGUST 28
TRADE BALANCE fall quickly.
+£4.296 bio MoM
© 2020 Associated Foreign Exchange, Inc. All rights reserved.CURRENCY OUTLOOKUSD
LOOKING BACK TO JULY
July started as it meant to proceed, with the US dropping
US $ EVENTS, AUGUST 2020
Hong Kong’s ‘special status’ in response to China imposing
its national security law on Hong Kong. Later in the month, the • Markit manufacturing PMI
Chinese consulate in Houston was ordered to close. This was • ISM manufacturing PMI
in order to protect the ‘intellectual property’ of the US and its
citizens. Photographs showed Chinese staff burning papers • Construction spending
outside the consulate under the heading ‘no smoke without MONDAY | AUGUST 3 • Trade balance
fire.’ The Federal government’s response to the pandemic
continued to be muddled and misleading. Ultimately leading WEDNESDAY | AUGUST 5
to a surge in infections across the sun belt states and at times Dollar Index/Source: Bloomberg
seeing 70,000 new cases per day. The unfortunate fact is that • Initial jobless claims
the US has 4.2% of the world’s population but around 25% of AUGUST EVENTS, OPPORTUNITIES THURSDAY | AUGUST 6 • Average hourly earnings
the COVID-19 cases due to this mismanagement. US banks
results were announced and showed Citgroup JP Morgan and
AND RISKS • Non-farm employment change
Wells Fargo making huge provisions for bad debts totalling 28 Last month we said that if the US dollar index didn’t fall below • Unemployment rate
billion US dollars. Congress is trying to agree a new stimulus 94.50, the dollar would be in an uptrend. Coming to the end of
July, 94.50 was breached decisively as prices fell to 93.40. This • Producer price index TUESDAY | AUGUST 6
package, but the Republicans and Democrats are far away
at the moment. In terms of support from the Fed Atlanta Fed was caused by a series of events amounting to a much more FRIDAY | AUGUST 7
President Bostic said that the US recovery was ‘levelling off’ negative view of the US dollar. However, one recent change in
while Cleveland Fed President Mester said that the Fed can particular has driven the dollar lower. This is the interest rate • Inflation rate
and will ‘do more’ if needed. situation. In plain terms, the return to an investor who buys a
bond (an interest rate product) is now so small that when inflation
WEDNESDAY | AUGUST 12
FED FUNDS expectations are stripped away, the investor loses money. This • Initial jobless claims
0.0% - 0.25% means that the US bond market which was once a place where
investors could get security and a positive investment return, is
now a destination where there is a cost to buying that security.
THURSDAY | AUGUST 13 • Industrial production
• Manufacturing production
GDP In this case, investors have shied away from buying US bonds
• Retail sales
+0.3% YoY
and hence the dollar. The pandemic in the US will take months
to get under control now and we have the presidential election
• FOMC meeting minutes SATURDAY | AUGUST 15
in November. There are more attractive places to invest your
INFLATION RATE money, including gold, which hit an all time high in July and the WEDNESDAY | AUGUST 19
US $ FUNDAMENTAL DATA
+0.6% YoY
euro where a pragmatic approach to the virus and the sharing
of debt has been agreed. • Durable goods
WEDNESDAY | AUGUST 26
UNEMPLOYMENT • GDP
11.1% THURSDAY | AUGUST 27
• Personal income
TRADE BALANCE • Personal spending
-$54.601 billion FRIDAY | AUGUST 28
© 2020 Associated Foreign Exchange, Inc. All rights reserved.z
CURRENCY OUTLOOKEUR
LOOKING BACK TO JULY
There may have been plenty of reasons to sell EURUSD at the end of June but by the end of July, they had been well and truly
EU € EVENTS, AUGUST 2020
usurped. An early clue was given by German Minister for Foreign Affairs, Heiko Maas, who said that he expected an agreement on
the EU support package by the end of the month. This was followed up by Dutch Prime Minister Rutte who said that a compromise
was possible on the EU recovery fund. Eurozone retail sales bounced higher by 17.8% from May but a real winning economic • Final manufacturing PMI
data point was that from Italy which announced a leap higher in Industrial production by 42% from May. Of course, this is from a
low base, but it was a very positive sign that the pandemic was being controlled by the EU leaders. As the month continued, ECB
MONDAY | AUGUST 3
President Lagarde stressed that ‘it is important for the EU leaders to quickly agree an ambitious package.’ The euro was squeezing
higher, but buyers were nervous as Dutch Prime Minister Rutte appeared to change his tune and said that he was ‘pessimistic’ • Final services PMI
that a deal would be agreed at the planned two-day summit. However, the EU leaders were resolved to make a deal and after a • Retail sales
marathon 5 days, they agreed a 750 billion euro package that was made of 390 billion euros of grants and 360 billion euros of
loans. It didn’t go unnoticed that the deal saw the 27 member nations jointly tap the markets for the funds and therefore share
WEDNESDAY | AUGUST 5
responsibility for each others debt. This is the first time that the EU has debt mutualization and is a sign of true monetary union.
EURUSD reacted accordingly and jumped to its highest level since September 2018, up by 5%. • Construction PMI
THURSDAY | AUGUST 6
BASE RATE
0.00% • ZEW economic sentiment
TUESDAY | AUGUST 11
GDP
-3.1% YoY • Industrial production
WEDNESDAY | AUGUST 12
EU € FUNDAMENTAL DATA INFLATION
• GDP
EURUSD/Source: Bloomberg
+0.3% YoY • Trade balance
• Employment change
AUGUST EVENTS, OPPORTUNITIES UNEMPLOYMENT RATE FRIDAY | AUGUST 14
AND RISKS
It seems that the EU never lets a crisis go to waste. The
7.4% • Construction output
MONDAY | AUGUST 17
departure of the UK from the European Union has produced TRADE BALANCE
+€9.394 billion
a togetherness that was used last month in the face of the
coronavirus pandemic. Not only did the EU control COVID-19 • Inflation rate
better than its peer group, but it then used the crisis to take • Current account
an important step towards true monetary union. The Eurozone WEDNESDAY | AUGUST 19
has been consistently criticised for not including debt mutualisation in its make-up but now that this has been remedied, albeit
• Flash services
in a one-off situation. This helped produce a real turnaround in the relative performance of the EU when compared to the US
and UK. The foundations for this transformation have taken years to produce and the US has certainly stumbled recently while • Manufacturing PMI
the UK has possibly shot itself in the foot with Brexit. Undeniably, the Eurozone will emerge quicker and stronger from the • Consumer confidence
pandemic than the US and UK. FRIDAY | AUGUST 21
© 2020 Associated Foreign Exchange, Inc. All rights reserved.CURRENCY OUTLOOKRoW
LOOKING BACK TO JULY
The AUD gained 3.5% against the US dollar in July. This was primarily because of US dollar weakness rather than AUD
AUD EVENTS, AUGUST 2020
strength. The Australian trade surplus for June was expected to be AUD 9 billion but came in at AUD 8 billion. The Reserve
Bank of Australia kept interest rates steady, whilst explaining that 800k people had lost their jobs because of the virus. To help
this situation, Prime Minister Morrison confirmed the extension of worker income support. Possibly hoping to calm the markets, • RBA interest rate decision
RBA Governor Lowe said that the AUD was trading ‘broadly in line with fundamentals.’ Whilst the forward-looking PMI data
was positive, it was US dollar weakness that helped the AUD stay supported. On the pandemic front, Melbourne had to return • Statement
to a six-week lockdown. TUESDAY | AUGUST 4
South Africa has not just two State owned businesses in dire straits now but three, as the South Africa Broadcasting Corporation
(SABC) recently explained its horrific debt problems. They have been struggling to even pay wages to staff for the past 9
months and owe ZAR 1.7 billion to creditors. On the particular question of South African Airways, Finance Minister Mboweni
spoke about approaching pension funds investing in SAA rather than using more state funds. Credit rating Fitch, when looking • RBA monetary policy statement
at the country’s overall situation said that a failure by the government to lower public debt risks, triggering credit, downgrades FRIDAY | AUGUST 7
deeper into sub-investment.
OFFICIAL CASH RATE
0.25% • NAB business confidence
TUESDAY | AUGUST 11
GDP
AUD FUNDAMENTAL DATA
+1.4% YoY
INFLATION • Wage price index
USDAUD/Source: Bloomberg
+2.2% YoY WEDNESDAY | AUGUST 12
AUGUST EVENTS, OPPORTUNITIES UNEMPLOYMENT
AND RISKS
While the market is focusing on US dollar weakness, it may well
7.4% • Employment change
be that the AUD benefits from that weakness. The short-term technical picture suggests that AUDUSD can reach 0.7275 whilst the THURSDAY | AUGUST 13
medium-term view could see AUDUSD target 0.7400. However, this may take some time to achieve, if and when, those levels are
seen this may well encourage some profit taking AUDUSD sellers. It could be that as China continues to expand its economy away
from its nadir earlier in the year which will be positive for the AUD.
While the US dollar is sinking around the world it has managed to stabilise against the South African Rand. This stability has meant that
the June low at 16.3220 has grown in importance. The recent high of USDZAR posted in April this year was at 19.3386 . This price
• Private capital expenditure
has corrected lower to 16.0000 in an overlapping manner. Momentum indicators show that the move down has quickly slowed. To FRIDAY | AUGUST 28
try and get out of its economic mire, the government has been granted a loan of 3.4 billion US dollars. There will be many conditions
attached and this should be a positive for the economy. So far, the Rand has not reacted to this news. As the market was expecting
the loan to be made it could have priced the news in already.
© 2020 Associated Foreign Exchange, Inc. All rights reserved.Trevor August Overview
CHARSLEY
Senior Markets Analyst
GDP INFLATION UNEMPLOYMENT
T: +44 (0) 207 004 3866
E: tcharsley@afex.com
afex.com
USD - +0.3% USD - +0.6% USD - 11.1%
CAD - -0.9% CAD - 0.7% CAD - 12.3%
EUR - -3.1% EUR - +0.3% EUR - 7.4%
GBP - -1.7% GBP - +0.6% GBP - 3.9%
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