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LOOKING BACK TO NOVEMBER UK £ FUNDAMENTAL DATA UK EVENTS DECEMBER, 2019 Sterling’s direction is still mainly being decided by the UK political situation. The announcement that the new Speaker of Base rate 0.75% the House of Commons was to be Sir Lindsay Hoyle (Labour) increased the chances of Brexit actually happening in January, GDP +1.0% YoY as he is not expected to take liberty with Parliament’s precedents and rules. The election polls aided sterling in November, as the CPI +1.5% YoY market currently thinks a Tory government will be good for the • Manufacturing PMI UK economy and for sterling. In this case, as the polls generally MONDAY | DECEMBER 2 Unemployment rate 3.8% had the Tory Party between 10 and 17 points ahead of the Labour Party, sterling was resilient to poor economic news. • Construction PMI Trade balance -£3.336 bio MoM TUESDAY | DECEMBER 3 Just to be clear, a Labour government or rainbow coalition of parties, including Labour, is seen by the market as negative for • Services PMI the UK economy. The Bank of England Governor, Carney, said DECEMBER EVENTS, OPPORTUNITIES AND WEDNESDAY | DECEMBER 4 • GDP economic risks currently “are skewed to the downside” and RISKS • Manufacturing production two members of the Monetary Policy Committee actually voted • Construction output • Goods trade balance for an interest rate cut at the November meeting. Sterling got a Economic data usually reports what has happened in the economy. This means, of course, that it is hard for policy makers to • Industrial production boost, as the Brexit Party announced it would not contest any • General election TUESDAY | DECEMBER 10 of the 317 seats that the Tory Party won at the 2017 election. guide the economy forward, whilst looking backwards. However, THURSDAY | DECEMBER 12 we do have the forward-looking purchasing managers index, However, as the month drew to a close, and it was suggested by • Flash manufacturing which is accepted as a reliable indicator for future economic John Curtice that the chances of a Labour majority government • Services PMI were almost zero, the focus moved to trying to calculate what performance. Unfortunately, the purchasing managers indexes MONDAY | DECEMBER 16 released in November were poor for the UK economy. Services • Average earnings would be the effect of tactical voting. • Unemployment rate PMI was 48.6 and manufacturing 48.3. As both of them were • Claimant count change below 50, this suggests that Q4 2019 may well see the UK TUESDAY | DECEMBER 17 economy contract. This being said, it comes as no surprise • CPI that the main event for sterling this month will be the election. WEDNESDAY | DECEMBER 18 If a rainbow coalition government is elected, we suggest that • MPC meeting minutes sterling will weaken initially as the market takes fright at an • BoE interest rate decision administration led by Labour leader, Corbyn. If a Tory majority is THURSDAY | DECEMBER 19 returned, then we expect sterling to rally initially. However, we • Consumer confidence • Retail sales do not expect it to maintain higher levels in the short-term, as FRIDAY | DECEMBER 20 the UK will be leaving the EU and moving to a new relationship with its largest trading partner. As 2020 moves on, we expect this negative sentiment to dissipate and overseas and internal GBPUSD/Source: Bloomberg investment to return to the UK economy, which we expect will produce a much stronger sterling in the medium-term.

LOOKING BACK TO NOVEMBER US $ FUNDAMENTAL DATA US EVENTS DECEMBER, 2019 The dollar was weak at the start of November after the Fed had cut interest rates by 0.25% to a range of 1.5% - 1.75%. Fed funds 1.5 - 1.75% However, this weakness did not continue, as US economic data exceeded its expectations. In particular, the GDP forecast was GDP +2.1% YoY 1.9% rather than the 1.6% expected, and non-farm payrolls increased by 128k in October rather than the 90k expected. • ISM manufacturing PMI Inflation rate +1.8% YoY MONDAY | DECEMBER 2 September’s figure was also revised upwards from 136k new jobs to 180k. As the trade talks with China slowly continued Unemployment 3.6% • ISM non-manufacturing the dollar managed to stay firm. Of course, a resolution to the PMI trade talks will be good for world trade and it will also be directly • Fed Quarles testimony Trade balance -$52.450 billion WEDNESDAY | DECEMBER 4 positive for the US. In fact, US equity markets made new all-time highs in November, and this gave the market another reason • Trade balance to buy dollars. Fed Chair Powell testified in front of Congress DECEMBER EVENTS, OPPORTUNITIES AND THURSDAY | DECEMBER 5 and said interest rates are currently at the appropriate level. RISKS • Average hourly earnings US retail sales supported the dollar as well, as they increased • Non-farm employment by 0.3% in October. Moreover, the dollar got another leg of The US economy continues to slowly expand. It is being driven change largely by the US consumer, especially as US trade is beginning • Inflation • Unemployment rate support, as the FOMC meeting minutes implied the Fed had FRIDAY | DECEMBER 6 finished cutting interest rates for the time being. to slow. This scenario alongside relatively high US interest • FOMC economic rates are also supporting the dollar. What is possibly slowing projections the US economy is the trade war between the US and China. • FOMC interest rate decision President Trump recently signed a bill into law, which supported WEDNESDAY | DECEMBER 11 the Hong Kong protestors and opened the door to China, losing • Retail sales its favourable trading nation status. Although the response from FRIDAY | DECEMBER 13 China was very mild, there were reports that the President still intended to increase tariffs on China on December 15th. This • Industrial production caused some dollar and US equity weakness initially, but we TUESDAY | DECEMBER 17 do not expect this to last. The reason for this expectation is that there is usually year-end demand for dollars from banks that • Personal income/spending have lent them over the year and need to shore up their balance FRIDAY | DECEMBER 20 Dollar Index/Source: Bloomberg sheets by December 31st. Some analysts are suggesting that the dollar strength we saw in November means that December demand will not be so strong. However, we also note that the • Durable goods TUESDAY | DECEMBER 24 Fed has been adding liquidity to the repo market for months now to the tune of roughly $75 billion per day, so it wouldn’t surprise if the dollar was bought again in December.

LOOKING BACK TO NOVEMBER EU EVENTS DECEMBER, 2019 It is interesting that volatility readings for the FX market are at ultra-low levels. However, this does, of course, relate to which currency is being considered. Sterling has been volatile, and emerging market currencies are also lively. Unfortunately, when one considers the euro, it is quite evident that this is where the volatility has slumped. At the time of writing, EUR/USD hasn’t even been able to move 2% for November and has only had a 6% range for 2019. The market was looking towards new ECB President Lagarde for inspiration and motivation to make new ranges but were ultimately disappointed. She announced a strategic review of monetary policy, whilst calling for the eurozone to create more economic growth between the 19 members. She continued that it was vital for eurozone governments to boost economic demand, especially as • Manufacturing PMI the economy was only expected to grow by 1.1% in 2019, being much lower than previously forecasted. Ultimately, it appeared to be a call for • ECB President Lagarde Germany to start spending its budget surplus, especially as Ms Lagarde asked for public investment to help rebalance the eurozone’s economy speaks towards less reliance on exports. Economic data for November merely confirmed the general torpor that the eurozone is currently experiencing. MONDAY | DECEMBER 1 • ECB Coeure speech So, as the US dollar is still enjoying a 2% interest rate premium over the single currency, a very slow downward move for EUR/USD would not TUESDAY | DECEMBER 3 surprise. • Final services PMI EU € FUNDAMENTAL DATA WEDNESDAY | DECEMBER 4 • Retail sales Base rate 0.00% • GDP • Employment change THURSDAY | DECEMBER 5 GDP +1.2% YoY • ZEW economic sentiment TUESDAY | DECEMBER 10 Core inflation +1.0% YoY • Industrial production • ECB Int rate decision • Press conference Unemployment rate 7.5% THURSDAY | DECEMBER 12 • Flash manufacturing EURUSD/Source: Bloomberg • Services PMI Trade balance +€18.654 billion FRIDAY | DECEMBER 13

• Trade balance DECEMBER EVENTS, OPPORTUNITIES AND RISKS TUESDAY | DECEMBER 17 Even though we may see some spells of volatility for the euro in December, it will probably be the case that recent ranges will not be broken. • Inflation rate Inflation is stuck at 1%, annual GDP growth at 1.2% is only just better than the UK’s performance, and unemployment is 7.5%. The new ECB WEDNESDAY | DECEMBER 18 President Lagarde will take her time before making any changes to monetary policy and, whilst she and her team are surveying the Eurozone’s economic performance, there are storm clouds appearing on the horizon. These take the shape of a possible government collapse in Germany, • Consumer confidence as the SDP moves even further to the left, and there are planned strikes by the railway unions in France. Recent eurozone PMI readings have FRIDAY | DECEMBER 20 shown slight improvement, but some still languish below the important 50 level, which indicates contraction rather than expansion.

LOOKING BACK TO NOVEMBER ROW EVENTS DECEMBER, 2019 The Reserve bank of Australia kept the cash rate unchanged at its record low of 0.75% with Governor Lowe suggesting that the easing has supported the overall jobs market and inflation. Chinese data generally showed a continued slowdown in the Chinese economy and, as such, the AUD weakened against the USD by some 2%. The Australian trade balance made for good reading as it beat expectations and came in at AUD 7.18 billion as well as September’s figure being revised upwards to AUD 6.62 billion from AUD 5.93 billion. The US-China trade negotiations crawled to their next stage and possible agreement of a “phase one” trade deal with President Trump saying they were very close to a deal but that he was holding the deal up to get the best terms possible. • CNY Caixin manufacturing The effects of the South African budget did spill over into November and pushed USD/ZAR to its highs for the month. South African interest PMI rates are currently 6.5% and do support the currency to a degree. As such, the rand did manage to gain some 4% back against the US dollar MONDAY | DECEMBER 2 over November. These gains were helped by the news that Moody’s credit rating agency did not downgrade South African debt after its latest • AUD RBA interest rate decision review. Out of all credit agencies, only Moody’s rates South African debt above junk status. TUESDAY | DECEMBER 3

• AUD GDP AUD FUNDAMENTAL DATA WEDNESDAY | DECEMBER 4 • AUD retail sales Official cash rate 0.75% • AUD trade balance THURSDAY | DECEMBER 5

GDP +1.4% YoY • CNY inflation rate TUESDAY | DECEMBER 10 Inflation +1.7% YoY • CNY new loans FRIDAY | DECEMBER 13 Unemployment 5.3% • CNY industrial production AUDUSD/Source: Bloomberg MONDAY | DECEMBER 16

• AUD MPC meeting minutes DECEMBER EVENTS, OPPORTUNITIES AND RISKS TUESDAY | DECEMBER 17 The market is yet again at the mercy of tweets from President Trump. Interestingly, he signed the bill supporting the Hong Kong protestors • AUD employment data into law, and although heavily criticised by the Chinese, their retaliatory actions were not meaningful. Therefore, the message from the Chinese THURSDAY | DECEMBER 19 is probably that they want to agree a phase one trade deal. In response to this strategy, the US administration has pushed even harder with President Trump saying the deal was dependent on whether he wants to make it or not. This style of approach has already been rebuffed by • CNY manufacturing PMI China and will not help the negotiations. The technical picture is actually suggesting a period of AUD strength in the short-term, targeting 0.6920 TUESDAY | DECEMBER 31 levels. However, this strength is not expected to last in the medium term and, as such, from January 2020, we expect AUD/USD weakness to resume with first targets being 0.6665 and then possibly lower. The implication here is that there is a long-term de-coupling between the US and China taking place, and this will ultimately not be beneficial for the AUD.

Senior Markets Analyst

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