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Forex Newsletter Update

Discussion and Analysis by Charles Porter:

After a somewhat subdued morning and afternoon yesterday, markets kicked to life. An abrupt claim from the Telegraph suggested that the UK and the EU had reached an agreement on the so-called Brexit ‘divorce’ bill. The news supported the Pound strongly, raising Sterling against the US Dollar by as much as 1%, extended to 1.5% as this morning’s session unfolded. Shortly after this news and its verification, South Korea reported that the North had fired an intercontinental ballistic missile. After a relative silence for around two months, the news could have been supposed to destabilise markets. However, the Asian session largely shrugged off these reports; a theme extended into the European open this morning.

 

 

 

Sterling Briefing: Progress made to progress

 

Yes, the process may well seem endless, however, it’s conclusion will come all too soon with the 29th March 2019 sworn to be the date that the UK will leave the EU. Nonetheless, considerable progress has been made in the pursuit of progression!

 

A couple of weeks ago, markets were, once again, highly pessimistic about the likelihood of December progress. Despite sanguine, or at least benign, comments flowing across the channel, markets arguably continued to under-price the propensity for second round progression in 2017 within the Pound. Their two main concerns were the upset that, in particular, Ireland and any other member state within the EU Council could provide to the prospect of progression. Secondly, the ‘divorce’ bill, or commitment to pay outstanding obligations, was threatening trade talks.

 

The latter of these concerns was clearly relieved with last night’s credible announcement. Sterling markets continue to rally this morning. It should be well noted that the pre-report exchange level, which was 1.323 against the Dollar and 1.114 against the Euro, will now become important sentiment pivot level.

 

The overnight resignation of Irish Deputy PM, Ms. Fitzgerald, has curtailed the risk of a snap election. With the problem of the Irish border still looming, the formed concern appears diminished too.

 

 

 

Euro Briefing: The Return of Data

 

The volume of global data has been low this week, with the economic calendar looking sparse. However, today, Eurozone soft data will be released in addition to key GDP and inflation reports. Inflation has stood in the way of tighter monetary policy in the Eurozone, with even the weak tapering of QE on uncertain ground. This afternoon, at 13:00GMT, November’s German Consumer Price Index, the favoured measure of inflation, will be released. It is forecast to show a tick up in the price level, in a potential sign of increased prosperity within the Eurozone economy.

 

In light of the significance of the German economy, if confirmed, the increase will spillover considerably into the aggregated Eurozone figure. However, markets could be wise not to overvalue the single currency, given the idiosyncratic performance of Germany, ahead of the other 18. Eurozone soft data, released at 10:00BST, left the Euro largely unmoved.

 

 

 

Dollar Briefing: What Missile?

 

Yesterday evening, the United States, represented by President Trump and Defense Secretary Mattis, confirmed South Korean reports of an intercontinental ballistic missile fire, coming from the North of the Peninsula. The test of a supposedly new missile not only follows a period of relative quiet from the North, but also brings with it a new threat to the United States and the stability of the global system. Analysts have suggested that due to the height of the missile, it may be capable of reaching the entire US. To paraphrase James Mattis’ comments last night; this is truly a global threat. So why did safehavens not rally?

 

Gold, the Japanese Yen and the Swiss Franc are only up mildly following last night’s events. Moreover, Asian stocks and markets overnight were relatively ambivalent to the news. However, the other side of the coin to a risk-off strategy has prevailed; US Dollar is facing a considerably headwind this morning.

 

 

 

The Day Ahead:

 

Consolidation of the Brexit progress will be critical. The PM will be absent from this afternoon’s PMQs. First minister Damian Green may be able to shed light on the developments, however, has a credible excuse not to. Yellen speaks to Congress at 15:00.

 

 

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SGM-FX View of london

Ireland, the Euro and the Pound

Discussion and Analysis by Charles Porter:

 

The US Dollar looked in a weak position throughout yesterday morning and into the early afternoon. However, the market open within the US saw a retraction from questionable Dollar weakness and move further away from a significant 1.20 against the Euro. Little changed yesterday to reverse the Dollar’s fortune with particular silence on the progress of Tax reform, the supposed cause of the Dollar’s weakness. This strength continues within the Dollar this morning, with the critical confirmation hearing of Fed Chair nominee Jay Powell at the Senate ahead. The UK Financial Stability Report from the Bank of England has found banks to be stable and in need of little adjustment to cope with potential Brexit disturbance.

 

 

Sterling Briefing: Irish Spillover

 

An Irish spillover is concerning Sterling markets this morning. Far from being some kind of cocktail, this is a pervasive spillover threat to the Pound Sterling from today’s Irish political activity. Controversy, complexity, and a deficit of accountable democracy surround the Houses of the Oireachtas, the Irish Parliament. The scandal is concentrated upon the actions of Deputy PM, Frances Fitzgerald. The Minister could face a vote of no confidence declaration today which, in turn, may lead to a general election within the country.

 

The current complexion of representative politics in Ireland is fragile to say the least. A set of agreements sees Fianna Fáil, Republican Party, abstain in key votes to allow Fine Gael, Ms. Fitzgerald’s party, to control a ruling coalition. However, as the scandal evolves, it is uncertain whether the House will honour this system and consolidation of power in the hands of those they feel to have done wrong.

 

The spillover to Sterling is not a new case of ‘the US sneezes and the UK gets a cold’. A solution for the Irish border is one of the pivotal issues that must achieve ‘sufficient’ progress before the EU Council, the 27’s heads of states, will agree to talk about the post-Brexit trading and social relationship between the UK and the EU. Ahead of the December Council meeting, Irish instability and the potential election of a new head of state could provide a considerable blow to the Pound. The Irish government remains in last ditch talks to avoid this possibility, but the threat weighs on Sterling markets today.

 

 

 

Euro Briefing: German Defiance

 

Yesterday, I criticised the interpretation of the Dollar’s weakness against the Euro’s strength in terms of domestic politics. I maintain this conviction, instead, isolating price and market action as the cause of the EUR/USD rally. This view has received support overnight with the Dollar consolidating its losses against the Euro and now moving back below 1.19. My argument revolved around greater political threat and uncertainty in Germany and the Euro area, than in the US. It seems that this theme extends further when we consider the relationship between Germany’s IFO economic sentiment indicator and GDP growth.

 

The relationship now suggests that the level of economic confidence in Germany is conducive with an economic growth rate of close to 6%. There is a disjunct between sentiment and outcome, therefore, arguably setting Germany up for a surprise in the coming months. At midday, Consumer confidence data is released and we await to see whether the public shares businesses’ surprisingly sanguine outlook.

 

 

 

US Dollar Briefing: Jay Powell

 

Federal Reserve Chair nominee Jerome Powell will appear before the Senate this afternoon. He is widely expected to be confirmed by the Senate. His words will be scrutinised to understand his stance on monetary policy during the hearing. The event of Powell’s non-confirmation would destabilise the Dollar, however, given Trump’s next-best persuasion towards John Taylor, the Dollar could receive an unlikely boost.

 

 

 

The Days Ahead:

 

The Canadian Dollar has underperformed. Weak inflation following hawkish monetary policy developments has weakened confidence in CAD. Low oil prices have similarly concerned the currency. Today’s Financial System Review and comments by Governor Poloz, in addition to Thursday’s OPEC meeting, will affect the Dollar significantly.

 

 

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European Struggles Overlooked

Discussion and Analysis by Charles Porter:

Many market commentators are attributing last week’s bullish Euro, 1.17s to mid-1.19s against the Dollar, to a reduction in political risk within Germany and Ireland. This view appears unfounded both in terms of pricing action and sentiment. In a moment of madness, analysts have managed to convince themselves that a minor abatement of what is a deeply threatening and pervasive political risk within two Eurozone states, is enough to cause the raging Euro. The implications of this view are non-trivial. Ultimately, erroneous diagnoses of the Euro could lead to a rapid correction of its strength. Sterling has made gains this morning, correcting last week’s losses against the Euro and strengthening its advance on the Dollar.

 

 

Sterling Briefing: No News it Good News

 

Speaking to an audience at the London School of Economics, Bank of England Monetary Policy Committee member, Dr. Ben Broadbent, based his outlook for interest rates upon the disparity between markets and the public. Specifically, Dr. Broadbent isolated considerable public and household confidence and satisfaction with Brexit against the market’s concern and vacation of uncertain Sterling. I believe this evaluation was correct and meaningful. Markets have generated such a run on the Pound Sterling that we have entered into an environment in which no news really is good news. The support within Sterling markets this morning is, therefore, most likely down to a rather quiet weekend on the Brexit front.

 

In a world of algorithmic trading, information is critical – in fact, some algorithms will even be based upon the density of a key word in the news. Perhaps, a profitable strategy at the Macro level would be to do just the opposite – if no one’s talking about Brexit for once, the Pound may get some support!

 

Looking ahead, each day closer to December’s critical EU Council meeting will be a hurdle for Sterling.

 

 

 

Euro Briefing: European Struggles Overlooked

 

The Euro was weakened considerably earlier last week by the breakdown of coalition talks in Germany. Just before midnight on Sunday 19th November, the Free Democratic Party (FDP) ended month-long talks with the CDU’s Angela Merkel. Seen as a mild political crisis in Germany, the development meant that the German polity, which has been without effective leadership for over two months, had little prospect of forming a coalition within the Bundestag. The conclusion was so bleak because the Social Democratic Party (SPD), the previous member of the Grand Coalition and one of Merkel’s two last hopes, had already comprehensively ruled out another grand coalition. However, Martin Schulz’s SPD did agree to hold talks; a political transformation that has been recognised for changing the Euro’s fortune. Simultaneously, the probability for a general election in Ireland amidst political tumult has apparently resided. With concession building, Varadkar’s minority government is said to be mildly more secure, although critical.

 

In both scenarios, I argue that the political risk remains immense. In Ireland, days of talks have flourished into zero progress. If anything, the peppering of the opposition with concessions demonstrates how desperate the incumbent party is, exacerbating the probability of an enduring impasse.

 

Similarly in Germany, the previously concrete position of Schulz’s SPD to not consider another grand coalition with Merkel should highlight to investors the fragility of the talks. Schulz’s previous unbending aversion to another grand coalition should indicate the potential cost to Merkel for attempting to achieve one. The weak bargaining position of Merkel’s CDU, facing another election, makes talks more unstable.

 

 

 

Dollar Briefing: Straggler

 

Last week was remarkably unfavourable for the Dollar. I ask you to question the relative cost of an inhibition to Trump’s Tax Bill and mild revisions to monetary policy forward guidance, versus total political impasse, both in Ireland and Germany. Admittedly, the single currency creates de facto risk sharing, allowing the idiosyncrasies of one nation to not spill over at the level of the currency. However, it’s simply not enough.

 

The Dollar, therefore, has once again become undervalued in the short run. This may explain the mild correction from week-end that we have seen this morning. Against the Euro, it appears the pricing action is only to test 1.20 once again and less to do with the underlying strength of the relative currencies. Looking ahead, Fed Chair nominee Jay Powell will appear in front of the Senate committee on Wednesday. The Fed’s current guidance is discounted by Yellen’s imminent withdrawal, making the event critical.

 

 

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Merkel’s Fortune Changes

Discussion and Analysis by Charles Porter:

The Pound Sterling, the Euro and, just about, the Dollar have all received a boost this morning. Climbing over their international counterparts, the Pound is being supported by optimism ahead of December’s EU Council summit. Following strong Eurozone soft data, released yesterday morning, the Euro has similarly received a tailwind. This morning’s Centre for Economic Studies ‘ifo’ survey mildly reinforced yesterday’s IHS Markit’s survey index – improving perceptions of Eurozone economies. The Dollar has been hindered by tax reform uncertainty while the Bill faces congress. Recent comments by the Federal Reserve’s central bankers has also undermined the Dollar. Looking ahead, it’s a big day for the South African Rand.

 

 

 

Sterling Update: Summit’s Brewing

 

On the 14th December, just a few weeks away, the EU Council will convene in Brussels for a routine summit. However, ahead of the meeting, many expectations have been brewing that the event will, perhaps, be make or break for the medium-term Pound. This morning’s mild appreciation follows a day of losses and profit taking that intensified yesterday afternoon. Yesterday marked the end of 7 days of gains against the US Dollar; an appreciative trend that has been reinvigorated this morning.

 

The appreciation is thought to be caused by the pricing-in of expectations for December’s meeting. The last summit was an immense success both for the Prime Minister and for the Pound. Praising May’s Florence speech and Brexit assurances, EU Council President, Donald Tusk, generated expectations that December’s meeting would bring about the signal for sufficient first-round progress. December’s meeting is perhaps the most important event left in the 2017 calendar, and already shapes markets.

 

 

 

Euro Briefing: SPDetour; CDU-turn

 

The Euro was weakened earlier this week by the breakdown of coalition talks in Germany. Just before midnight on Sunday, the Free Democratic Party (FDP) ended the month-long talks with the CDU’s Angela Merkel. Seen as a mild political crisis in Germany, the development meant that the German polity, which has been without effective leadership for exactly two months from today, had little prospect of forming a coalition within the Bundestag. The conclusion was so bleak because the Social Democratic Party (SPD), the previous member of the Grand Coalition and one of Merkel’s two last hopes, had already comprehensively ruled out another grand coalition. This led some to call for Merkel’s resignation and declaration of another election. In turn, the Euro was weakened by a spillover from Germany’s chaos.

 

However, last night, Martin Schulz’s SPD has agreed to hold talks. The position of Schulz and the SPD is, as yet, still cloudy. However, even the offer to entertain talks is positive for political progress in Germany. This progress has made the Euro a considerable winner this morning when considered in conjunction with yesterday’s optimistic economic soft data. The Euro continues to gain impressive ground against an inhibited US Dollar, trading over 1% higher than at the beginning of this week, above 1.185.

 

 

 

Dollar Briefing: Franklin to Trump

 

Benjamin Franklin is attributed with the famous quotation that nothing in this life is certain, except death and taxes. 227 years on from the death of the founding father, President Trump certainly does justice to this quotation, making the US and the globe far less certain. However, Trump is also attempting to have his say over Franklin’s inexorable taxation with, at times, questionable success.

 

Expectations for Trump’s tax reform are positive for a market-based United States and, consequently, the Dollar. While the bill struggles through congress and its success is questioned, the Dollar continues to be inhibited. Moreover, newly dovish US central bank comments are only exacerbating its weakness.

 

 

 

The Days Ahead:

 

Today, the South African Rand will be impacted by the November revision of key national ratings. Fitch Ratings agency has already released its unchanged ‘junk’ debt status. However, currently teetering on the lowest bound of investment grade by Standard & Poor’s and Moody’s, today’s release will be highly market sensitive.

 

 

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Dovish FOMC

Discussion and Analysis by Charles Porter:

Yesterday evening, at 19:00BST, the minutes from November’s Federal Open Market Committee (FOMC) meeting were released. A December rate hike in the US is already heavily priced in by the market and widely taken for granted. Yesterday’s release affirmed this sentiment, confirming the members’ commitment to raising the target interest rate band next month. What is equally important to the value of the US Dollar and the shape of the US yield curve is future monetary policy expectations. These were weakened by the release and, accordingly, the US Dollar lost considerable value. The Dollar has continued to struggle on currency markets this morning, losing 1% against the Euro week-to-date.

 

 

The minutes show that Janet Yellen’s more dovish comments, that were expressed during her public conversation with Sir Mervyn, are shared by the entire FOMC. The minutes revealed that members are concerned inflation has disappeared for longer than previous envisaged. With some market participants pricing in up to four US rate hikes next year, the news was negative for today’s US Dollar. Frequently, individual agents within bond and currency markets have demonstrated distrust in the forward guidance of the Federal Reserve, basing their engagement with markets upon the assumption of as few as two US rate hikes in 2018.

 

Speaking to New York University’s Stern School of Business, Federal Reserve Chair Janet Yellen explained that inflation was more illusive than had been previously envisaged. One conclusion from this was that the concerningly low inflation that has currently plagued global economies may not just be transitory. Yellen said that “there may be something endemic here that we need to pay attention to”.

 

A concern about price and wage inflation at times of hyper-low unemployment and strong economic growth was the overwhelming take-away message from the FOMC minutes. Due to the concurrent headwind that the US Dollar is facing caused by a turbulent congressional hearing of Trump’s tax reform bill, the Greenback has struggled to find a footing.

 

Monetary policy is crucial to the value of a currency because interest rates determine the reward for saving or holding it. Similarly, although quantitative easing was not the subject of the FOMC minutes, it too determines the money supply in the economy and, therefore, the clearing value of the domestic currency.

 

The more ‘dovish’ reading that appeared within the minutes entails that there are greater inhibitions within the monetary policy setting committee to raising interest rates and, thus, the rate of return on savings. The mixed message was derived from the FOMC’s continued commitment to raising rates this December amidst a warning of medium term interest rates.

 

The curve, the difference between 2 and 10- year yields on sovereign debt, flattened upon this news reflecting the expectation of tighter monetary policy in 2018. During an episode of near-term interest rate hikes, it is inevitable that the curve flattens slightly because all points are dragged to a new yield. However, given that near-term forward guidance was unchanged, this flattening represents an underlying concern and disbelief in the forward looking intentions of central bankers.

 

It appears then that the federal reserve once again turns to a more data-dependent stance on monetary policy. This move has the effect of increasing currency market volatility to episodes of hard data, making fluctuations in the currency more severe. Ahead of 2018, we look towards December’s monetary policy decision to understand more about the future path of interest rates.

 

 

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Morning Briefing

Discussion and Analysis by Charles Porter:

 

Sterling markets have opened weaker this morning following a budget that was overshadowed by pessimistic growth forecasts. Sterling markets reacted ambivalently to the second reading of third quarter Gross Domestic Product (GDP). Measuring economic growth, the statistics release showed no change. Currency markets are showing a mixed message this morning showing considerable early morning volatility. There were decisive moves overnight with the Pound Sterling and the Dollar weakening across the board, while the Euro gained approximately 0.15%. Yesterday evening, the minutes of the Fed’s November 1st monetary policy decision were released, creating a mixed but negative outlook for the US Dollar.

 

 

 

Sterling Briefing: Budget Overshadowed

 

Yesterday’s budget was delivered to the House of Commons with considerable showmanship and bluff. The Chancellor’s hand contained little more than off-suit low cards – 1.5 and 1.3 to be precise. However, the chancellor managed to find a concealed rabbit within the deck, admirably silencing the qualms of critics and the public alike. Hammond confronted the housing challenge confidently. Many will argue that the policies were shortsighted and do not confront the systemic problem of low housing supply and reinvestment that the UK has achieved. However, in terms of a political event for the Conservative Party and cabinet to rally behind, the Autumn budget just about managed.

 

The Pound fell by around 0.25% during the Chancellor’s speech, before ending up in positive territory when the speech was concluded. The conclusion of such a high salience speech allows Sterling to appreciate because it will necessarily reduce the volatility and anticipation that markets hold. The Chancellor presented growth forecasts that slashed GDP growth by 0.5% this year and in 2021. With the political uncertainty that has surrounded the incumbent government building, this budget had to be a resounding success. The last thing the Pound needed was a major January cabinet reshuffle from a lack of ministerial confidence.

 

 

 

Euro Briefing: European Confidence

 

The Euro has been one of the only winners in this morning’s trading session. One probable cause is its temporary escape of political and economic challenges that are becoming increasingly apparent in the UK and US economies. The Euro has gained around 1% against the US Dollar since the beginning of this week, correcting back towards the 1.20 levels we saw in September.

 

This morning, IHS Markit’s Eurozone soft data index was released. The survey-based data defied dominant market expectations for a worsening of the services and manufacturing indices. The consensus forecast would have seen the aggregated soft data index for the Eurozone retreat minimally. In contrast, the composite purchasing manager’s index increased to 57.5, up from October’s reading of 56. The soft data saw the Euro spike mildly as expectations were priced out. The gains survived morning trading.

 

 

Dollar Briefing: Conflicting Messages

 

Yesterday evening, at 19:00BST, the minutes from November’s Federal Open Market Committee meeting were released. A December rate hike in the US is heavily priced in by the market and widely taken for granted. Yesterday’s release affirmed this sentiment, confirming the members’ commitment to raising the target interest rate band next month. What is equally important to the value of the US Dollar and the shape of the US yield curve is future monetary policy expectations.

 

The minutes show that Janet Yellen’s more dovish comments, that were expressed during her public conversation with Sir Mervyn, are shared by the entire FOMC. The minutes revealed that members are concerned inflation has disappeared for longer than previous envisaged. With some market participants pricing in up to four US rate hikes next year, the news was negative for today’s US Dollar.

 

 

The Days Ahead:

 

From a data standpoint, the week should end with little drama. However, as Germany’s incumbent Chancellor, Angela Merkel, speaks with rival SPD-leader and former EU Parliament President, Martin Schulz, about a potential coalition, we wait to see if Germany’s political impasse will be relieved – expectations are minimal.

 

 

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Budget in Depth

Discussion and Analysis by Charles Porter:

Today’s budget was delivered to the House of Commons with considerable showmanship and bluff. The Chancellor’s hand contained little more than off-suit low cards – 1.5 and 1.3 to be precise. However, the chancellor managed to find a concealed rabbit within the deck, admirably silencing the qualms of critics and the public alike. Hammond confronted the housing challenge confidently. Many will argue that the policies were shortsighted and do not confront the systemic problem of low housing supply and reinvestment that the UK has achieved. However, in terms of a political event for the Conservative Party and cabinet to rally behind, the Autumn budget just about managed.

 

The Pound fell by around 0.25% during the Chancellor’s speech, commencing shortly after 12:30, before ending up in positive territory upon its conclusion. Although perhaps sinister, the conclusion of the speech rallied the pound slightly because the opportunity or need to expound further negative news had passed.

 

 

The Chancellor presented growth forecasts that slashed GDP growth by 0.5% this year and again in 2021. With the political uncertainty that has surrounded the incumbent government only growing, this budget had to be a resounding success. The last thing the Pound needed was a major January cabinet reshuffle from a lack of ministerial confidence.

 

As the Chancellor has been forced to indicate over the previous months, the coffers to cover the potential fallout from Brexit were almost empty. The Chancellor’s commitment of £3bn yesterday for the next two years struck a necessary but also conservative tone. A higher fiscal insurance budget would have frightened markets both in terms of the opportunity cost foregone in inflationary-biased spending and by increasing the expectations of the cost of Brexit.

 

Expectations of pragmatism without scaremongering were therefore balanced adequately by the Chancellor. The vote of no confidence that would force a government defence and test of May’s leadership over the Commons and country has now reared its head twice. At least with considerable spending and popular allocation, there is something for the conservative party to rally behind. Should Hammond’s budget have placated dissenting back-benchers, her leadership will prove to be more secure.

 

Political security is uncommonly critical to the United Kingdom at present. The Brexit process was triggered by Article 50 of the EU’s Lisbon Treaty. This Treaty itself, as we are all too acutely aware, contains a clause limiting the secession arrangement process to two-years from declaration, in the absence of unanimous support for an extension.

 

The distraction of yet another general election and potential third leadership contest in little over three years, would prevent progress on the UK’s exit from the EU within this highly constrained time horizon. Moreover, should a general election occur, it is highly likely that Cabinet Secretary David Davis would be expelled from negotiations regardless of the result.

 

Whether or not Davis is the most qualified or well-suited to the role of the UK’s lead negotiator in Brexit negotiations is inconsequential. Davis and his EU counterpart, Michel Barnier, as well as their surrounding team members, will have inevitably come to develop a rapport, and have achieved progress and understanding. Moreover, the entire mandate of the Secretary of State would most likely be undermined and re-written, leaving the UK with probably less than a year until the all-important 29th March 2019.

 

Political solidarity is therefore key to the Pound due to the high salience of satisfactory post-Brexit arrangement. It is plain to see the importance of Brexit progress to the Pound. Following the referendum and in the ensuing months, the value of the pound was eroded by around 20%. This change entirely reflected the pricing in of risk and uncertainty about what the future place of the UK amidst the EU, and the world, would be.

 

The announcement of under-expectation public deficit following the Spring budget could also be positive for the Pound. Primarily since the European Sovereign Debt Crisis, markets, rightly or not, have become incredibly sensitive to the value of public debt as a percentage of GDP. The fact that the conservative government managed to convince a public to elect them in purely because they would pursue a costly and painful path of austerity exemplifies how highly valued budgetary parsimony has become!

 

An under-forecast public deficit throughout the two quarters since the Spring budget frees up room for Hammond to facilitate inflationary spending. In turn, with only incredibly tight monetary policy on the cards, exemplified by ultra-low interest rates, the Bank of England might be free to change their forward guidance and management of market expectations.

 

All in all, the Pound had a good day and is likely to extent its gains over the medium term if it is not railroaded by Brexit. The volatility during the event still indicates that Brexit is the single greatest determinant of the value of the Pound. After all, news of potential December first round sufficient progress from Donald Tusk at the last EU Council meeting generated far greater upside return for the Pound. However, the easing of political tension takes at least one headwind out of the picture, for now.

 

 

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SGM-FX View of london

Bailout Budget

Discussion and Analysis by Charles Porter:

 

As markets open this morning, it is apparent that the value of the US Dollar was harmed by Janet Yellen’s remarks during a public conversation with Sir Mervyn King, former Bank of England Governor, last night. Speaking at the NYU Stern School of Business, Yellen painted an opaque picture of the US economy that undermined inflation and interest rate expectations. The picture across European equity and currency markets remains mixed, with similarly small movements within the Pound Sterling. Today, Phillip Hammond will deliver his Autumn Budget. The importance of fiscal expenditure within the domestic economy will mean that the budget is highly important for monetary policy and, thus, for the value of the Pound.

 

 

 

Sterling Briefing: Bailout Budget

 

Brexit stagnation, political scandal and vote of no confidence threats. The picture of the UK government has looked overwhelmingly bleak at times in the past month. However, May still remains, at least for now. The Prime Minister will be hoping that this afternoon’s Budget speech delivered to the House by the UK Chancellor, Phillip Hammond, will rally her cabinet and party; quashing the move for a vote of no confidence and bolstering her negotiating position vis-à-vis Europe.

 

Post-Brexit, the growth forecasts provided by the Bank of England and the Office for Budget Responsibility have been highly pessimistic. In order to stabilise the rate of economic growth, as measured by GDP, higher public spending may be imperative. Government spending is a component of GDP and thus can compensate for the feared downturn in consumption and investment. Supply-side spending will also support overall productivity, a significant concern within the current UK political economy.

 

Yesterday’s public finance data demonstrated above-consensus October borrowing, however, added to a picture of a sub-consensus deficit following Spring’s Budget. Looking ahead to the budget, May’s speech at the Manchester Conservative Party Conference should dictate a housing and supply-side focus. This kind of spending is less likely to spill over to the aggregate price level. However, should Hammond’s speech create positive or negative expectations of inflationary public spending and stimulus, expectations will converge on higher future interest rates, steepening the curve, and appreciating Sterling.

 

 

 

European Briefing: Banking Authority

 

Once thought to be a prized stake within Brexit negotiations, the fate of the European Banking Authority and larger European Medicines Agency, presently domiciled in London, has been decided. The former will be hosted in Paris, France, with the latter being relocated to Amsterdam, Netherlands. With a considerable populist momentum within the latter country, the decision to award Netherlands with the Agency, and its concomitant jobs, may appear to be somewhat ‘fool me twice’. Elsewhere in Europe, the Swedish Krona has been in tumult. It was shored up by central bank action yesterday, appreciating by around 1.2%.

 

 

 

Dollar Briefing: Hide and Seek

 

Speaking alongside the former governor of the Bank of England, Sir Mervyn King, the Federal Reserve Chair, Janet Yellen, downgraded the prospects of an interest rate hike when commenting upon all-illusive inflation. The US Dollar is trading down by around 0.25% against the Euro, and losing moderate ground to an uncertain Pound. Previous Federal Open Market Committee minutes have warned about low inflation, however, mildly shrugged it off as transitory, inviting the prospect of future hikes. However, last night Yellen warned “there may be something endemic here”. Markets internalized these comments, slightly pricing out the probability of a December hike, flattening the yield-curve and depressing the Dollar.

 

 

 

The Days Ahead

 

Hammonds Budget speech is scheduled for 12:30 BST this afternoon. It will undoubtedly be a critical component of the medium term UK economy and certainly today’s major FX event. Following disparate comments from Yellen last night, this evening will bring another opportunity to understand the composition of the US Federal Reserve when the FOMC release minutes from their last meeting at 19:00 BST. Elsewhere, we continue to look at the shocking depreciation in the Turkish Lira of ≈12% year-to-date; 2.2% week-so-far.

 

 

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Brexit Bill Increased

Discussion and Analysis by Grace Gliksten
 

It has been reported that Prime Minister Theresa May won ministerial support to increase the Brexit offer from €20bn to €40bn yesterday. May is hoping that the increase will unlock stalled negotiations, but has been warned by Eurosceptic colleagues that this is conditional upon securing good transition and trade agreements with the EU. The increase is intended to close the gap between the UK’s initial offer of €20bn and the €60bn expected by the EU.
 
Ministers have speculated that the promise from the UK to respect its outstanding EU commitments could mean a bill of €40bn to €50bn. While the UK accepts some obligations, there are several questions surrounding the full details of these. These include the issue of pensions for EU staff, and how the UK’s contribution is calculated. Another contentious issue surrounds the question of building projects that have had funding approved by all EU states, but where work will not start until the Article 50 process has been completed.
 
The increase was approved by a 10-member subcommittee in Downing Street yesterday. One minister said, “there is consensus behind the prime minister’s position – for now.” Foreign Secretary, Boris Johnson, was part of the subcommittee and one of the members who agreed that the increased offer should be dependent upon the EU opening transition talks in December and settling on an encouraging trade agreement next year. Another member who agreed with Johnson said, “it has to be something for something … this can’t be unconditional money.” Eurosceptic ministers have also said, however, that Britain should be prepared to walk out of talks if a bad trade deal is proposed by the EU. This follows the same tone as May who said, “nothing is agreed until everything is agreed”.
May is expected to wait until the last possible moment before making her improved financial offer. She has confirmed that the offer will only be made when she is sure that it will break the stalemate in negotiations ahead of the EU summit next month. 8th December has been signalled by officials as the date the offer will be made, despite Michel Barnier’s, the EU chief negotiator, pressure to deliver the proposal by the end of this week.
 
May is holding off on the offer in order to gain the most leverage in negotiations.. May is waiting for assurances from EU leaders that the proposal would be received favourably and wants the European Council to declare that first round talks have made “sufficient progress”. She wants the increased offer to help open talks on the transition deal and trade agreements.
Negotiations have been complicated by the current political uncertainty in Germany. The breakdown of talks to form a coalition under Chancellor, Angela Merkel, has left Germany in an unprecedented political crisis. With both the coalition and Merkel’s position unclear, May has been encouraged to exploit the current weakness. However, Thomas Matussek, former German ambassador to the UK, said, “I think German instability is bad news for Britain.” Moderating these comments, he added that he believes that the problems in Berlin would make “no operational difference” to the EU’s position on Brexit.
 
The Pound has benefited from positive Brexit news, improving across the board since the decision. Against the Euro, German political instability has exacerbated Sterling’s strength. The Pound rose 0.69 percent against the Euro, moving from 1.1230 to 1.1305, still short of the gains made at the end of October. It also increased 0.59 percent against the US Dollar, from 1.3175 to 1.3264.
 
 

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UK Public Finance

Discussion and Analysis by Charles Porter:

Sterling markets once again look more robust at market open this morning. While the outcome of yesterday’s 10-strong ’inner’ cabinet meeting has not been made public, and is not expected to become so within the next few weeks, reports coming from media and privileged cabinet ministers are positive. Dominating the Financial Times this morning, newspapers attest to a consensus within May’s recently divided Cabinet. Meanwhile, Merkel’s struggle in Germany shows little sign of abating, fostering concerns of a second general election. This morning, Reserve Bank of Australia (RBA) Governor, Phillip Lowe, will speak. Following dovish RBA monetary policy recently, this speech confers risk into the Aussie Dollar.

 

 

Sterling Briefing: Public Finance

 

Ahead of what will be a critical Autumn budget, public finances will once again be drawn into focus this morning. Public Sector Net Borrowing statistics will be released at 09:30 BST. Markets could prove to be highly reactive to Hammond’s budget, particularly if the outlook for public spending is sparse and parsimonious. ‘Spread-sheet Phil’ will determine his own legacy tomorrow as markets would perceive the UK economy to be unsupported and uncertain should austerity economics prevail.

 

There still remains less risk in the Pound Sterling from budgetary politics than from negotiations and Brexit. Household opinion of Brexit remains intact and, if anything, continues to grow. In direct contrast, market sentiment about the progress of negotiations and future trade remains overwhelmingly negative.

 

The Pound Sterling opens higher this morning primarily due to overnight reports that May’s increased ‘Divorce Bill’ offer has been approved by her inner cabinet. The offer, according to cabinet officials and every text book on negotiating theory every written, is likely to be unveiled shortly before the next EU Council meeting and the internal EU deadline for ‘sufficient’ progress – a couple of weeks away.

 

 

 

Euro Briefing: Escape Route

 

Ms Merkel has held the office of Chancellor within Germany for the last twelve years. She has well and truly embedded herself as not only part of the German political fabric but become and integral and versed authority within the EU Council. Markets are not pricing her difficulties as considerable political risk – the yield on German bonds remains relatively stable. However, surprisingly, there is evidence of the stagnation weighing on the Euro. Eurozone data is quiet this week with the exception of Thursday’s reading of ‘soft’, sentiment-based, data that frequently proves to move markets.

 

 

 

Dollar Briefing: Sanctions and Sanctions

 

Two forms of sanction will have a considerable say on the short-medium run path of the US Dollar: Firstly, the possibility for a new set of sanctions that President Trump has suggested North Korea will now face following their accession to the “state sponsors of terror” list. Secondly, the sanctioning of the widely-anticipated Tax reform. With the former considerably within the remit of the controversial President, the latter is now almost exclusively within the hands of congress, will few channels of influence left for the White House. Any new sanctions on North Korea will not, by themselves, create any upside within the Dollar. Instead, any abatement of the geopolitical risk that Pyongyang continues to create will support the USD.

 

 

 

The Days Ahead:

 

Later this morning, around 10:00 BST, Bank of England Monetary Policy Committee Members, Jon Cunliffe, Ian McCafferty, Michael Sunders and Gertjan Vlieghe will appear before the House of Commons Treasury Select Committee. With the former member being the only MPC participant present that voted against a rate hike, markets will value understanding the internal BoE division to comprehend the future of UK monetary policy. Safehaven assets have become increasingly important with rising global uncertainty and insecurity. Therefore, as the Swiss Franc is a member of this class, this afternoon’s speech by Thomas Jordan, Chairman of the Swiss National Bank, could make CHF markets sensitive.

 

 

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