UK trade deficit balloons to eight-year high as Sterling brushes off Brexit concerns
11/May/2016 • Currency Updates•
The Pound strengthened against both of its major peers on Tuesday, brushing aside concerns of a possible Brexit vote and the UK’s growing trade deficit.
A matter of weeks away from the crucial vote on EU membership, the National Institute of Economic and Social Research yesterday suggested that the UK’s currency could depreciate by as much as 20% in the immediate aftermath of a leave vote.
We think that this is an excessive estimation, and would expect a decline in the currency of roughly 10% against the US Dollar and 5% versus the Euro. Read our full Brexit currency report.
In the meantime UK businesses remain focused on tomorrow’s Bank of England meeting and quarterly inflation report. We expect this to cause short-term Sterling volatility, so businesses may want to ensure they have efficient risk management in place.
The announcement, often coined as ‘Super Thursday’, is expected to shed more light on the central bank’s view on domestic and global economic conditions as well as the Bank’s take on next month’s referendum. This may give Sterling traders an indication as to when the BoE may hike interest rates.
The Japanese Yen continued to reverse much of its recent gains on Tuesday, with the currency falling sharply for a second day following a slew of warnings from Japanese officials that the Bank of Japan was ready to intervene in the FX market in order to weaken the Yen. Koichi Hamada, a key economic advisor to Prime Minister Shinzo Abe, suggested that the BoJ would take action should the Yen strengthen to the 90-95 level per US Dollar.
Before this week’s BoE meeting, industrial and manufacturing production figures are both expected to show contractions on a year previous. Last week’s PMI suggested that the UK manufacturing sector contracted for the first time in three years in April.
Major currencies in detail:
Sterling steadied against its major peers on Tuesday, rallying 0.2% against the US Dollar and 0.3% versus the Euro.
The trade deficit in the UK economy ballooned to its highest level in eight years in the first quarter of this year, according to fresh data released by ONS yesterday. Despite fairly decent numbers for the month of March, which showed a 1.9% rise in exports compared to a modest 0.6% decline in imports, the overall picture remains decidedly bleak.
In the first three months of the year the trade balance plunged to £13.3 billion, its largest deficit since 2008. Equally as worrying, the trade gap with the rest of the EU increased to its highest level ever recorded, ahead of next month’s referendum on EU membership.
Britain’s trade performance clearly provided a significant drag on overall economic growth, which slumped to just 0.4% in the first quarter.
Today’s monthly production data will be the highlight this morning. NIESR’s GDP estimate this afternoon could steal some attention, although is generally not a particularly significant market mover.
The Euro ended 0.1% lower against the US Dollar on Tuesday, despite some impressive trade data out of Germany.
The trade balance in Germany swelled to a record high level in March. The surplus soared to €23.6 billion from €20 billion following a significant 1.9% increase in exports and a sharp decline in imports.
Industrial production in Europe’s largest economy was not so impressive. Output declined in the year to March by 1.3% following a meagre 0.4% expansion in the month from February.
Announcements in the Eurozone are fairly light today. Investors will instead await more significant announcements later in the week, including this Thursday’s Euro-wide industrial production data and Friday’s revised GDP growth figures.
With a lack of significant data releases in the US, the Dollar was barely moved during London trading yesterday, ending 0.15% higher.
JOLTS job openings, seen as a good indicator of labour market strength in the US, rose more than expected in March. Openings increased to just under 5.8 million, significantly above expectations and just shy of a record high level.
Meanwhile, wholesale inventories barely rose in March, suggesting little impact on first-quarter economic growth. Inventories edged up to 0.1% following February’s 0.6% decline.
Today looks set to be similarly quiet in the US economy, with external factors likely to drive the US Dollar today. Mortgage applications and the monthly budget statement from the Fed this afternoon are not expected to rock the boat.
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