The pound has made good gains across the board at the start of the week despite continuing focus around the main issue of what a future UK EU trade arrangement will look like. Some of the strong gains could be attributed to positive comments from Secretary of State for Foreign Affairs Dominic Raab who said, “We are reasonably confident that we can do a free trade agreement with the US in the first wave of post-Brexit trade deals.”
However, there is a view that a poor UK EU trade relationship would be bad for the UK economy. Ipek Oskadeskaya, senior analyst at Swissquote Bank says “The most decisive phase of the Brexit negotiations will likely continue weighing on business. In fact, avoiding an immediate no-deal Brexit didn’t necessarily save the UK from walking out of the EU without a deal at the very end.”
Meanwhile, the spread of the coronavirus dominates the headlines at home and abroad with suggestions that there could be a greater knock on effect than the 2003 SARS virus.
Stephen Roach former chief economist at Morgan Stanley said that “markets had underestimated the impact of the virus. We were going into this shock and it is going to take us right to the threshold where we technically may be operating at a global recession pace in the first half of this year.”
Reports have also emerged that emergency plans are being drawn up in Britain to withstand coronavirus should Chinese factories and cities be shut for long periods which could hurt British trade. This of course comes at a time when Britain tries to forge new relations with the rest of the world when the economic outlook is less certain.
This morning sees a raft of UK economic data including trade balance and industrial production numbers. Most importantly UK Growth Domestic Product figures will be released at 09:30. The preliminary figure for the 4th quarter is expected to arrive at 0% down from 0.4% previously. Now that Britain has formally left the EU, markets will pay close attention to these numbers and any improvement or deterioration could impact on the price of sterling.
The euro suffered a setback yesterday after Italian industrial production numbers plunged to its lowest level in two years with many sub sectors in decline. The data is in sharp contrast to the stronger German production data last week. The European Commission releases its economic growth forecasts today which could make for interesting reading at a time when the EU continues to battle with low inflation and weak economic growth. Friday will see Growth Domestic Product numbers for the fourth quarter and could create volatility considering both the Italian and French economies have been reported to have contracted.
The US dollar has been boosted after last week’s US non-farm payrolls increased to 225,000 in January which was much higher than the forecast of just 160,000 new jobs. This is welcome news for US President Donald Trump who ended his week on a high having been acquitted of impeachment charges. The Federal Reserve meanwhile have said that an improvement in trade conflicts and global growth at the end of 2019 had reduced risks to the US economy although it has commented that the coronavirus had “presented a new risk to the outlook.” The US Fed have stated in their guidance that interest rates will remain between 1.5%-1.75% until the end of 2020. However future prices compiled by Bloomberg are pricing in at least one quarter point cut.
The Reserve Bank of New Zealand will meet overnight for the latest interest rate decision. Expectation is for the central bank to hold interest rates at 1%, although any clues offered as to future policy could help move the markets.
The New Zealand dollar is likely to be sensitive to Coronavirus due to the volume of exports to China. In 2003, at the time of the SARS virus the volume of NZ exports to China was running at 5%. Today, that figure is about 26% leaving a much greater exposure to any downturn in China if the economic outlook worsens.
On the plus side for the New Zealand dollar there is an expectation that China may seek to offer more concessions to the US to help bring an end to the trade war.
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