Sterling
Sterling strengthened slightly versus most of the majors on Friday, helped by news that Britain’s ubiquitous trade deficit narrowed by £1.2 billion in June.
An £800 million uptick in exports combined with a -£300 million dip in imports brought the UK deficit down to -£11.8 billion. It was the first full month of trade data since the historic referendum on June 23 and analysts noted that the weaker Pound probably contributed to the spike in demand for British exports. A separate report showed that UK construction output remained flat in July, beating the median consensus of a -0.8% fall.
Data from the corporate bond market shows that the large drop in Sterling following the ‘Brexit’ vote, combined with the Bank of England’s new bond-purchasing efforts, has driven droves of foreign investors into Sterling-denominated bonds. Often these corporate bonds are snapped up almost entirely by domestic buyers, but the relative value offered by the weaker Pound means that foreign investors are now competing with UK traders to snap up these corporate bonds, which offer significantly higher yields than government debt. This scenario could continue to prop Sterling up over the next few months, so long as British economic performance does not begin to deteriorate sharply.
Euro
The Pound to Euro exchange rate increased in value by around a third of a cent on Friday as sturdy UK ecostats gave rise to a small Sterling appreciation.
While UK construction and trade balance figures came in stronger than markets had anticipated, the only European print of note showed that German exports tumbled -2.6% in July, bringing the nation’s trade surplus down from €21.4 billion to €19.4 billion. The disappointing report follows news that the currency bloc’s flagship economy saw signs of weakness in its highly prized industrial sector in July.
Demand for the single currency was also hurt, to a certain extent, by news that the Eurogroup had urged Greek politicians to work faster on reforms in order to secure the Hellenic nation’s next tranche of bailout aid.
US Dollar
‘Cable’ softened by around half a cent on Friday during the New York session in response to hawkish comments from Federal Reserve official Eric Rosengren.
Boston Fed President Rosengren, who is traditionally one of the more dovish members of the committee, said that the US economy was at risk of overheating if policymakers did not ‘pursue a gradual normalisation of monetary policy’. The upbeat comments bolstered the appeal of the ‘Greenback’ as September rate hike bets surged
from 20% to around 33%.
Canadian Dollar
The Pound rallied by over a cent against the Canadian Dollar on Friday as swelling Fed rate hike bets ate into investors’ demand for risk-correlated assets. The crude-linked ‘Loonie’ was also hurt by a -2% drop in oil prices and a labour market report showing that unemployment ticked higher from 6.9% to 7.0% in August.
Australian Dollar
The risk-off mood in global financial markets also took its toll on the high-beta ‘Aussie’ Dollar on Friday. GBP/AUD leapt higher by almost two cents throughout the day as hawkish Fed sentiment weighed on risk appetite. The Australian Dollar also appeared to suffer following remarks from Reserve Bank of Australia President Glenn Stevens suggesting that he may act to loosen policy if the domestic currency were to strengthen over the next few months.
New Zealand Dollar
A 130-pip Sterling appreciation against the New Zealand Dollar completed a hat trick of gains for the Pound versus the commodity bloc on Friday. As was the case with the ‘Loonie’ and the ‘Aussie’, it was the uptick in Federal Reserve tightening calls that prompted a steady outflow of investment in the risk-sensitive ‘Kiwi’ Dollar.