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Cabinet Stagnation

Yesterday, the US Dollar was the winner within the three major currencies. The Dollar appreciated against the Euro to drive the EURUSD rate down below 1.1920. Similarly, against the Pound, the Dollar threatened to break below 1.35; a move that was realised this morning. Despite a largely benign public reaction to Theresa May’s cabinet reshuffle, Sterling had a challenging start to yesterday morning, before regaining some of its losses in the afternoon trading session. This morning has been far more tumultuous for the Pound and the Dollar. Positive manufacturing data was published at 09:30 this morning, showing above consensus production largely across the board. However, current account (trade balance) data that was released simultaneously showed a larger than anticipated and exaggerated trade deficit for November. The data was mildly concerning, particularly given the boost to the UK’s export market from a consistently cheap Pound and concomitant increase in competitiveness. The confused economic data saw the Pound Sterling initially rise, before falling by approximately 0.3%. Sterling fell to below 1.13 against the Euro and briefly collapsed to below 1.35 against the Dollar. However, around 10:30 this morning, the Dollar experienced a sharp sell-off, eroding its value to 1.355 against the Dollar, and back through 1.20 against the Euro.



Sterling Briefing: Status Quo


Once the confusion surrounding the appointment of Chris Grayling as Conservative party chairman was cleared up, public reaction was largely ambivalent towards Theresa May’s cabinet reshuffle. The core members, including but not limited to, the Foreign Secretary and the Chancellor, were unmoved. There was the potential for the controversial foreign secretary to be relocated; a move that would likely destabilise the Pound due to infighting and uncertainty, but surround the prime minister with an atmosphere of strength and power.


The Pound did not react violently to the reappointments. During the announcements on Monday afternoon, the Pound did continue to appreciate. However, the negligible trend was all but exhausted by Tuesday morning, with the Pound consistently shedding value throughout today’s trading.


David Lidington replaces Damian Green as Theresa May’s second in line, following the resignation of the disgraced minister. His appointment to Minister for the Cabinet Office, a position that will see him stand in for Mrs. May at PMQs during her absence, is controversial. The minister, promoted from Secretary of State for Justice, had previously served Mr Cameron’s cabinet as the minister for Europe.


Unsurprisingly given the bias of the incumbent Conservative government during the referendum, Mr Lidington is a passionate and unequivocal supporter of the European project. The minister’s new position will afford him considerable influence over the PM and the government’s actions. Given the result of the referendum and the strong influence of Vote Leave protagonists Boris Johnson and Michael Gove in the Commons, the appointment could generate considerable friction. Conflict is something that the Conservative Party and Prime Minister can scarcely afford, following the loss of a majority in the commons and a humiliating, if not unfortunate, Conference speech.




Dollar Briefing: Under Pressure


Virtually all assets associated with the United States have come under immense pressure today. Not only the Dollar, but also US equities and government bonds came under strong selling pressure. An announcement from Bloomberg today suggested that Chinese authorities were considering reducing their accumulation and purchases of US government bonds. China is the largest single nation, non-domestic, holder of US government debt. The foreign exchange reserves of the Republic are also magnificent, presenting acute challenges to the value of the Dollar.


The as-yet unverified announcement caused the dollar’s value to fall by around 0.6%, with only moderate value being recovered in the afternoon’s trading session. The yield on US government bonds increased sharply, hitting highs of around 2.59% on the 10-year note; a level unparalleled since March last year. The move has caused investors to declare the end of decades of a bullish international bond market, with prices now beginning to fall.


The adjustment in US bond yields cannot be attributed to the rumour-mill alone. The rise in yields is likely to be assisted by a revaluation of inflation expectations, as the global macroeconomy could be turning a corner. The market for US bonds and currencies alike is now dominated by bearish investors; those predicting a decline in the value of both the Dollar and US government debt. However, rising inflation could prompt the Federal Reserve to raise interest rates to the benefit of the greenback. With a change of leadership in the Fed and the replacement of former Chair Janet Yellen, there could be a more positive medium run outlook for the Dollar.




Safe Havens and the Yen:


Coinciding with the losses made so far within US equities, there has been a mild risk-off move in markets today. Measured by three stereotypical safe haven assets below, the Japanese Yen, the Swiss Franc and Gold against the Pound Sterling, market investors can be seen to move out of riskier assets and into security. The only piece of the picture missing from the risk-off move is a rise in bond prices, explained above.

In addition to the appreciation in the value of safe haven assets, the Yen has appreciated unilaterally and violently. The Bank of Japan, the Japanese central bank and monetary policy authority, announced a reduction in its long-term government bonds. This has been reported as a shift towards policy normalisation; an evolution of ‘crisis’ global monetary policy and under-stimulated global macroeconomies that is not isolated to Japan. The two-days following the announcement have seen the Yen gain 1.5% against the US Dollar.





Discussion and Analysis by Charles Porter



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Bouncing Equities, Depressed Currencies



Towards the end of last week, the Dow Jones soared above $25,000.00, whilst the Dollar continued its decline. The two are unlikely to be mere coincidence as the weaker Dollar supports the activities of the outwardly orientated, international, blue-chip companies that populate the industrial index. In the UK, whilst the move has been slightly less parabolic than in the US, the FTSE100 simultaneously broke 7,720 for the first time ever. Equities rage in the UK similarly due to the weak Pound Sterling following the Brexit referendum.


The outperforming currency of 2016 and 2017 thus far has been the Euro. Unsurprisingly, the Euro Stoxx 50 is neither at a monthly, yearly, nor all-time high. The inverse correlation of stock markets and currency markets is nothing new; the phenomenon is almost as old as equity markets themselves. However, the present form of the relationship does shed light on the salience of global ultra-accommodative monetary policy, economic confidence and exchange rates. This morning, the EUR/USD currency pair has retreated back below 1.20, encouraged by a definitively stronger Dollar and mildly bearish Euro. These dynamics mean that, today, the GBPEUR cross threatens 1.13, while cable retreats back towards 1.350.  This week, we look ahead to a reading of Germany’s economic performance as measured by Gross Domestic Product. The data release is scheduled for 09:00 on Thursday and will prove salient for the Euro. The strong likelihood of a data-led conclusion to the monetary stimulus program, quantitative easing, is making hegemon-led economic growth imperative within the monetary union.




Sterling Briefing: Shuffle Up


In the United Kingdom, the House of Commons returns following its Christmas recess. Today, therefore, marks the first possible day from which Theresa May is expected to announce her cabinet reshuffle. The first change to 2018’s ministerial composition will be particularly important when considered against the Conservative Party’s 2017 legacy of weakness, division and scandal. At least a partial change is necessary due to the recent resignation of First Secretary of State, Damian Green. This scandal further undermined the position of the UK prime minister making any reappointment critical.


The unwavering thorn in Theresa May’s side and Foreign Secretary, Boris Johnson, is unlikely to see his job taken away. Similarly, the pivotal Secretary of State for Existing the European Union, David Davis, looks almost certain to retain his job. Whilst key cabinet positions, not limited to those above, are unlikely to change, it is not impossible. The injection of uncertainty from the dismissal of a pivotal member of parliament and cabinet minister would, more than likely, have a negative impact upon the Pound. However, a longer lasting sentiment of confidence from a previously threatened, constrained and vulnerable prime minister, could stem the losses.




Euro Briefing: Coalition Draws Closer


A formal German coalition between Merkel’s Christian Democratic Union, its Bavarian counterpart, and Schulz’s Social Democratic party (SPD) could be in sight. More than three months have passed since national elections were held to decide the 19th Bundestag. Angela Merkel has held the position of Chancellor consecutively since the 16th Bundestag was elected in 2005. Her fourth Chancellorship now looks more certain as the SPD seriously entertains talks on another consecutive grand coalition.


Economic performance, both when measured by lagging hard data and more reactive soft data, continues to be strong in Germany. The country therefore looks moderately unimpeded by political instability and the lack of a formal coalition. However, the importance of finding a stable coalition to govern Europe’s largest economy should not be understated.


German political stability has ramifications for Germany, the wider Eurozone and even the UK. The United Kingdom must be met with credible negotiating partners within the European Council. If Merkel’s mandate to negotiate for Germany on the European stage in seen as weak or fleeting, the UK’s ability to secure a deal on Brexit is challenged. Similarly, German political instability will not be permitted forever. Whilst German and Eurozone bond yields have remained largely stable, eventually the polity, and potentially the Eurozone within which it is embedded, would be punished.




Dollar Briefing: Jobs Data Release


There were two headlines from Friday afternoon’s pivotal economic data release: An expected, and positive, level of wage inflation, and an unforeseen, larger than anticipated fall in employment (payroll) numbers. Shown in the graph below (Left), the release saw a considerable sell off in the Dollar as payroll data underwhelmed analysts and investors. As the publication was analysed in further depth following the release, the Dollar regained the value that it had shed moments ago. This morning, the Dollar continues to shrug-off last week’s underwhelming reading of the US labour market. This Friday, the Bureau of Labour Statistics will release its reading of the rate of inflation for the US in December. Inflation data continues to be imperative whilst monetary tightening continues to be inhibited by a price level that refuses to appreciate, suggesting an under-stimulated, and potentially under-productive, economy.




The Loonie:


A Canadian employment report was released simultaneously with the United States’ review, generating a series of frantic trends within the North American continent. The release saw the Net Change in Employment variable exceed expectations by almost 70,000. A better-than-anticipated labour market performance led to a fall in the unemployment rate of 0.2% from November. The 0.2% decline was recorded in defiance of a reading that was expected to show a 1-point tick up in the unemployment rate, to 6.0%. A strong labour market performance is usually associated with a stronger performance across the wider economy. The Canadian Dollar appreciated steeply following the release, shown in the graph above (right) against the Pound Sterling. Combined with a weakening Dollar, the USDCAD exchange rate depreciated by 1.11% instantaneously, making the Loonie far more valuable than its US counterpart.



Discussion and Analysis by Charles Porter



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A Warming Channel

Discussion and Analysis by Charles Porter:


In a year that could see the further normalisation of developed economies’ monetary policies as well as the restoration of volatility and geo-political risk; fortune may well favour the brave. However, on this, the first trading day of the New Year, fortune also appears to favour Sterling, with the Pound outperforming all of its G10 counterparts at market open. A weakening US Dollar also pushes the cable rate (GBPUSD) through its previous resistance level of 1.3550; just shy of September’s post-Brexit flash high. Following an outstanding year for the Euro, gaining around 7% on a trade weighted basis, it is unsurprising that the Euro trades at its strongest rate versus the Dollar in over three years (up to 1.2075).



Sterling Briefing: A Warming Channel


Tides have turned in the English Channel as the UK finds an ally in Northern France. Foreign Secretary and Leave protagonist, Boris Johnson, spoke of the inevitability of a favourable Brexit based upon the international bargaining power derived from the UK’s supposed obsession with Italian Prosecco, French wine and German cars. He was subsequently blamed and ridiculed by his international political counterparts for making an insulting and reductionist claim. However, concrete vested interests clearly now matter:


Setting forth his intentions for this year, the President of Hauts-de-France, a central northern region encompassing Calais and Dunkirk, has declared his intention to express leverage over the French President, Emmanuel Macron. The region is particularly exposed to Brexit given the high volume of trade that passes through the Channel. The timing of the announcement and endorsement of a softer Brexit could not be more optimal. However, this is no coincidence.


Secession negotiations will recommence soon, considering the all important future trading and security arrangements of the post-Brexit United Kingdom and EU-27. Similar support could provide Sterling with a floor to continue its defiance of GBPEUR parity and rally towards unbroken SR 1.1520 resistance.



Euro Briefing: Testing Ground


Despite being forecasted to contain two of the biggest political risks of 2018, the Eurozone is enjoying a bold market call. The lack of a coalition agreement within the Bundestag in addition to a considerable far-right composition is undermining the political stability of the Europe’s largest economy. Similarly, the Italian elections that are now little more than two months away could upset the single currency. The GBPEUR exchange rate has been mildly bearish towards the end of 2017. However, as the currency pair draws close to intersecting its moving average resistance, presently sitting just above 1.13, and previously broken fib resistance at 1.1384, the Pound’s future could soon become more transparent.




Dollar Briefing: 2017 Hangover


An unrelentingly bearish US Dollar has continued through to 2018, with the EURUSD currency pair opening above a symbolic 1.20, and passing comfortably through 1.205. The diagnosis of Dollar weakness remains under substantiated and, concerningly, a similarly erroneous remedy may be concocted. A re-priced tax reform has taken center stage for the re-priced US Dollar; a variable that many are increasingly viewing as a scapegoat for market movements that are challenging to explain. However, somewhat more concerningly, stagnant Federal Reserve monetary policy is being blamed for the Dollar’s weakness.


The European Central Bank has hesitantly restrained its asset purchasing program (or Quantitative Easing) to €30bn, commencing this January, in a puny move that was priced as a severely ‘dovish’ monetary policy announcement. Meanwhile, the Pound Sterling was hammered by what was seen as a corrective, ‘one and done’ interest rate hike. The outlook for US monetary policy remains dovish and if markets have started as they mean to go on, the Dollar could be in trouble. At UK market close this afternoon, the cable rate momentarily broke 1.36, a symbolic level that, if retested, opens up considerable headroom for the Pound’s appreciation.




The Days Ahead:


A US labour market report is due on Friday. Weak (wage) inflation now holds US monetary policy back; data that could be re-evaluated, moving the Dollar significantly.



Discussion and Analysis by Charles Porter



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