The pound sterling has a sentiment problem while the US dollar finds its employment report rally short-lived.
The Sunday papers astonished readers yesterday with the revelation that rich people use the tax haven, Panama, as a tax haven.
The really breathtaking bit was that 1.5m documents were stolen by a whistleblower.
Even on the cheapest paper that's 7.5 tons. What could the doorman have been thinking?
The weight on sterling was even greater than that at the end of last week, making the pound Friday's worst-performing major currency by quite a margin.
Thursday's UK data had shown greater-than-expected economic expansion in the fourth quarter of 2015, 0.6% instead of 0.5%, and strong mortgage approvals.
On Friday morning Nationwide's index put house prices 5.7% higher on the year and the manufacturing sector purchasing managers' index came in 51.0, shy of the predicted 51.2 but two ticks better on the month.
There was nothing among those figures to provoke a sterling sell-off.
So it must have been sentiment that sent it lower, because the pound lost an average of -0.8% on Friday - one euro cent - to the other dozen most actively-traded currencies.
The Brexit threat continues to loom over sterling.
On the week and the month it has fallen by an average of -1.4% and -2.6%, its only gains being against the US dollar.
Construction PMI in Welcome Beat of Expectations
The new week got off to a decent start for sterling as UK construction companies indicated a sustained upturn in overall business activity during March.
The Markit / CIPS Construction PMI read at 54.2, better than the 54.0 forecast and unchanged on the previous month’s reading.
Looking ahead, the majority of survey respondents (51%) expect a rise in business activity at their units over the next 12 months, while only 11% forecast a reduction.
So it would appear that the EU referendum is not weighing too heavily on this sector.
The Evolving Brexit Story Part 1
According to a survey of 120 UK CFO’s the biggest primary business risk remains Brexit. According to the poll 75% of those polled viewed remaining in the EU as preferable, this compares with 62% in Q4 ’15.
Although business is increasingly fearful of the risks of exit, the latest opinion poll from the Observer newspaper puts the Brexit campaign ahead with 43% deemed to be supporting exit as opposed to 39%, albeit 18% remain in the don’t know camp.
It will be that latter group that will likely decide the result of the poll. However, the anti-Brexit campaign has to mobilise young voters, those who are often reluctant to vote, unlike more exit orientated older voters. Unless the young can be persuaded to vote the risks of Brexit are likely to continue to advance.
In the light of the opinion polls and a record Q4 current account shortfall this risks ongoing discussion of investor flight, in the process bedeviling Sterling.
Expect this to be especially the case should services PMI fail to rebound in March; the February reading of 52.7 was the lowest since March ’13. We would favour GBP USD testing towards 1.4110/20.
The Evolving Brexit Story Part 2: Brexit and a Sovereign Downgrade
Standard & Poor’s has repeated its earlier warning that Britain could lose its much-prized AAA rating if the country votes to leave the European Union.
Writing an opinion piece on the Politico website, S&P’s chief sovereign ratings officer Moritz Kraemer said:
"Brexit would further polarize the U.K.’s political system, increase risks to effective, transparent and predictable policymaking, and diminish the U.K.’s long-term sovereign creditworthiness. Brexit also heightens potential risks to economic growth and the balance of payments, as well as domestic political threats to territorial integrity.
"Consequently, a vote for “Leave” would likely lead Standard & Poor’s to lower the U.K.’s AAA rating — a rating it has held, without interruption, since 1978. While the U.K.’s rating would likely remain high given its many institutional, financial and economic strengths, the U.K. would lose its place in the increasingly exclusive club of AAA-rated sovereigns."
US Labour Market Data Helps the Greenback
Friday's US ecostats were helpful to the dollar but, except against the pound, their effect was fairly short-lived.
Good as they were, they were not enough to make any real difference to the perception that the Federal Reserve is nervous about spoiling the economic picture with a too-hasty rate increase.
Nonfarm payrolls beat forecast by 10k, increasing by 215k in March, and average hourly earnings increased by a worthwhile 0.3%.
The two manufacturing PMIs either met or exceeded forecast and consumer confidence looked okay at 91.0.
In 90 minutes the dollar strengthened by a cent against the euro, only to give back more than half of that gain before the end of the day. Although market expectations for Fed policy vary almost by the week, Friday's data failed to make a case for higher rates in the near future.
Oil down, yen up
Reasonably or not, the current logic has it that lower oil prices do not just reflect, but actually cause economic weakness, increasing demand for safety. That seemed to be the case over the weekend, when the yen strengthened by 1.5% as the price of oil fell -4%.
The Australian dollar was one of the poorest performers, partly as a result of that general concern but also because of disappointing Australian retail sales, which were flat in February. The sales data on their own cost the Aussie a cent this morning.
Other data today cover Euroland unemployment and investor confidence, Britain's construction sector PMI and US factory orders. The Bank of Canada governor will be speaking this afternoon.
Watch out too for the thorny matter of Greek debt, which threatens to raise its ugly head again as bailout talks recommence.
* The 3% improvement on the exchange rates offered by a high street bank is based on an exchange rate comparison for a telephone transaction of £100k into Euros between Moneycorp and HSBC, Natwest, Barclays, Lloyds Bank, Royal Bank of Scotland and Bank of Scotland International Banking taken 7 times between April and November 2015. Moneycorp’s average margin for this period was 3.08% better than the combined average margin for the banks.