Survival

 

The Euro may have rightly earned its default position of strength and power that is so frequently actively and passively attributed to it when discussing Brexit. One of the principal arguments for forming a monetary Union is security, risk sharing and solidarity. When FX markets must move so freely in developed economies, why not band together and dampen the short and long term volatility that classic national currencies face. For example, whereas the general election and Brexit referendum brought havoc to the Pound, the Euro barely moved in the face of a peppering of high salience national elections.

 

The argument in a bubble works beautifully, one would eventually arrive at the partial conclusion that Mundell did as early as the 1950s: the ideal currency area is the world! However, just as the Canadian economist conditioned and constrained his conclusion and reductio ad absurdum, so too will I.

 

The argument works so long as one continues to view the equation from the point of view of the exception; the implicated (troubled or flourishing) member state. As soon as one considers the equation for the group, there remains the inescapable propensity for defection and the success of a populist desire to secede. Particularly when one includes politics, we are all too aware that national desire can turn on a sixpence.

 

If a downturn was protracted, for example, it is easy to see how either the concerned member state or the surrounding block could grow tired of the afflicted state’s incorporation within the group.

 

Now though, with the survival of French, German (just), Dutch and Italian (so far) elections, the Euro is standing tall and potentially earning its widespread buy rating and standing as an emerging principal safe haven currency. The concept of disunity within the single currency is being discussed far less, lending weight to the market’s sanguine evaluation of the Euro. This morning, the Euro threatened 1.23 against the Dollar once again, following a week long bearish trend for the EURUSD cross.

 

 

 

 

Discussion and Analysis by Charles Porter

 

 

Click Here to Subscribe to the SGM-FX Daily Newsletter

 

 

Copy and Paste

 

The 21-month transition deal between the United Kingdom and the European Union has been struck, announced, and hailed by Michel Barnier and his UK counterpart, David Davis. The Pound rallied and equity markets spluttered, but make no mistake, no progress has been made.

 

In fact, the outcome of one year of tense negotiation between the bloc and the United Kingdom has achieved nothing more than a glorified and celebrated extension of 2005’s Lisbon treaty! Substantively, the opt-in-opt-out structures that Theresa May, David Davis, Conservative spin doctors and the town crier will boast about amount to nothing but an extenuation of the 1992 Maastricht treaty.

 

Consequently, it’s the framework within which the UK has engaged with the EU for over one quarter of a century already! Truthfully, the arrangement is little more than a copy and paste exercise from a document that most likely generated the impetus for a Brexit, alongside the Euro and a single market.

 

In other words, the brand new, dynamic and innovative transition deal that David Davis compelled European institutions and his EU counterpart to dream up and cooperate with are entirely absent.

 

The concept that any member state could secede from a Community or Union that made European continental warfare “not only unthinkable, but materially impossible” was just that; unthinkable! Therefore, what resulted, the two-year provision within the Lisbon Treaty (the first European legislature to mention the surrender of membership), is purely arbitrary; how long could one possibly need to achieve a Brexit?!

 

Whilst this could just be one citizen expressing his dissatisfaction with the result of one entire year of negotiation alongside the expenditure of millions, if not billions, of public sector money, there is something meaningful behind the argument. The significance of the underwhelming agreement suggests that the Pound could be overvalued in the short run.

 

Over the past few weeks, volatility has increased across the board. Markets have been jittery from the global bond to equity markets, slashing billions of Dollars at every corner. The move in trans-Atlantic FX markets on Monday evening may therefore be more short-lived than one might have expected from the single most important political risk that the Pound has experienced in almost a century.

 

As investors mull over the agreement, they may come to realise the magnificence of the job that UK negotiators have in front of them. Some may validly argue that the lack of innovation and imagination displayed within the transitional proposal is only consistency, allowing business an extra 21 months to get their head around a magnificent and as yet fictitious post-Brexit arrangement.

 

You are free to make your mind up on this debate and it is imperative you do so. However, it seems inexcusable to me that some hint of innovation and coalition building has not made its way into the arrangement. After all, how better could one prepare business for a potentially biblical regulatory shift than by phasing it into a transition deal that will deliver us into the next decade?

 

Rhetoric surrounding the announcement suggested that the public, business and would-be Pound bulls may even want a second transitional arrangement, this time with something substantive in. This discussion, let me tell you now, is futile in light of its inevitable denial within the European Commission and Council alike.

 

The European Union pays for itself under a Multi-Annual Financial Framework (MFF) that lasts at most seven years, but sets forth member states’ communal spending and funding desires. Inconveniently for the United Kingdom, the present MFF expires shortly after the transitional deal that is currently on the table. This was the very reason for the denial of a two-year transitional period that Theresa May requested during her speech in Italy in late 2017.

 

Unequivocally, the UK cannot be a meaningful member within this debate and may not remain a half member any longer. Unfortunately, the opt-outs that the 1992 treaty and now this proposal provide will be insufficient to allow a half membership; how can a budgetary debate concerning the UK and a post-Brexit European Union possibly allow another voice to the table?

 

In short, the appreciation of the Pound Sterling that pervaded across markets on Monday evening could be all too short lived. As I have written since the start of 2018, something needs to happen on Brexit, and fast! Should the leader of the opposition, shadow Brexit secretary and opponents within the Commons in general credibly uncover the insufficiencies of the transitional arrangement, the position of Theresa May, Brexit, and the Pound could once again be on a much weaker footing than the public may appreciate.

 

The news has propelled the GBPEUR cross up to 1.1470 and around 1.4150 against a Dollar weakened by yesterday’s monetary policy decision from Gerome Powell’s Federal Reserve. The Pound is now valued at the uppermost point within its horizontal crab, has broken through January’s previous high of 1.1510. Following the BoE’s rate decision this afternoon, we saw the Euro trade at a year-to-date high of 1.1530.

 

 

 

 

Discussion and Analysis by Charles Porter

 

 

Click Here to Subscribe to the SGM-FX Newsletter

 

 

One In One Out

 

Fasten your seat-belt, hold the nearest handrail, dump your equities, your Dollars and grab all of the Swiss Francs, Japanese Yen and Gold you can get your hands on. Ignoring the former two imperatives designed to do little more than compensate for the impotence of the latter requests, the above risk-off strategy could be the destination of smart money in the coming months. Certainly, it has been in the trading days surrounding last weekend.

 

Last week, Vladimir Putin secured a mandate to govern through to his 24th year of premiership over the Russian state. The mandate may have secured the political integrity, and certainly political consistency, within the Russia; however, across the globe the re-election has been anything but stabilising. Outside of the Rouble, the reaction has been minimal. The principal reason for a quiet risk off strategy was the fact that a Putin victory was the base-case for almost every investor across the globe.

 

Putin’s victory and daunting new, 6-year mandate represents an increase in underlying (geo)political risk. Unequivocally, Putin is one of the remaining faces of the East-West divide across the world. As China’s Xi Ping consolidates power in Asia, less risk is created due to the trade dependencies between the two international leviathans. With Russia, however, the story is very different.

 

Following the election of Trump to rule over the United States, the involvement of a deviant Russian state has made headline news with alarming frequency. A refreshed mandate for the Russian principal is likely to cement the paradigm of political risk that we have experienced for a little over one year.

 

As markets sense an increase in political risk they are swift to dump risky equities and the US Dollar. Depending upon the severity of the risk, money either flows into domestic (US) treasury and bonds, or other safe haven assets. Frequently, the benefactors of a geopolitical risk-off move and ultra safe haven bid include the Japanese Yen, the Swiss Franc and Gold, raising their desirability and market price.

 

Alongside the Russian threat to the Dollar, and thereby substantiating the hyperbole of the first sentence to this article, is the increasing audibility of Turkey and President Erdogan on the international stage. Earlier this week, the controversial leader announced Turkey’s intention to continue to extend its dangerous and threatening military campaign in the war-torn nation of Syria.

 

This news cannot be digested without a reminder of the suspension of passporting rights between the US and Turkey only a few months ago. Movement between the United States and Turkey was suspended, inviting a decimation of the Turkish Lira, but also to a lesser extent the Dollar. Stopping short of the exaggerated claim of a tripartite proxy war in the Middle East, a resolution of interfering foreign policies must be achieved if the global economy and the dollar are to invite plain sailing in the foreseeable future. Arguably, the dismal performance of the Dollar in 2017 could be attributable to a peppering of risk-off moves, frequently down to outright terrifying geopolitics that upon every occasion forces the marginal investor to avoid equities and the dollar at this time and to seek return elsewhere.

 

 

 

 

Discussion and Analysis by Charles Porter

 

 

Click Here to Subscribe to the SGM-FX Newsletter

 

 

One In, One Out

As the President’s cabinet comes to look more and more modelled upon a revolving door policy, market volatility has increased somewhat. Rex Tillerson became a household name as a symbolic and quintessential original appointment within the Trump administration’s cabinet. The former CEO of ExxonMobil of ten years forfeited much of his participation in the private sector in order to join Trump’s cabinet. The appointment served as a beacon and testimony to Trump’s focus and semi-infatuation with the economy and business; one of the substantive cornerstones of his successful election campaign.

 

Whilst the appointment of the energy market heavyweight is not important to the success of the United States’ polity, his dismissal does follow a period of uncomfortable and unprecedented tumult within Trump’s inner circle. The decision yesterday was met with an unmistakable risk-off strategy, much to the detriment of the US Dollar. The yield on US 10-year treasury fell by as much as 5 basis points in a reaction to the news as money fled from falling equity markets and into government backed public debt.

 

In the risk off move, the price of safe haven assets including Gold, the Japanese Yen and the Swiss France also rose sharply. The increase in global political risk was accentuated by Trump’s announcement and concretisation of a considerable tariff upon Chinese exports to the US. The Dollar is still framed by most to be on a strongly bearish trend, with dominant expectations converging on a steady and sustained depreciated through to year-end.

 

Ignoring the Sterling side of the equation and the Br-elephant in the room, if these expectations are upheld, we would see cable (GBPUSD) trade close to one and a half US Dollars to the Pound and a Dollar be worth approximately 70% of the European single currency (EUR). During the risk off move, the Dollar fell by 0.70% against its more fortunate safehaven partner, the Japanese Yen and by a comparable amount against the Franc. The Dollar sunk to an intraday weak point of above 1.24 Dollars to the Euro.

 

 

 

 

Discussion and Analysis by Charles Porter

 

 

Click Here to Subscribe to the SGM-FX Daily Newsletter

 

 

False Start

 

Over the past couple of days, Sterling has enjoyed two optimistic and seemingly genuine rallies that have ultimately all but dissipated within a matter of hours. Yesterday, Robin Walker, the Undersecretary of State for the Department for Exiting the European Union, or David Davis’ sidekick as he might be better known, suggested that the UK and the EU are “very close” to a transitional and implementational deal.

 

On the news, the Pound leapt by as much as 0.75%, trading only 10basis points short of the psychological resistance level of 1.40 against the US Dollar. Throughout the trading day today, despite further positive news for the UK political economy and a less sanguine outlook for the greenback, cable has still stopped short of 1.40; reaching an intraday high of 1.39944. Against a strengthening Euro, the Pound battled upwards, yet, too failed to break through the psychological Euro support of 1.13; topping out at 1.12969.

 

As GBPEUR remains in the lower third of its horizontal trading channel, the news does question the support dynamics of the Pound. Ceteris paribus, trading pressures would suggest that we revisit nine-month highs in excess of one euro and fourteen cents to the Pound, however, time is running out on Brexit!

 

Today, the UK Chancellor Phillip Hammond delivered his Spring Statement; bringing no major surprises to the budget. Despite the high salience of the event, the content of Hammond’s consistent and austerity-biased economic governance remained largely the same. Most substantially, resilient economic performance facilitated the chancellor to constrain net fiscal borrowing to £45.2bn. The major news that supported the Pound, however, was the privilege of the Chancellor to deliver.

 

The Office for Budgetary Responsibility, in accordance with UK public institutions, the Office of National Statistics and the Treasury, allowed Chancellor Hammond to revise the GDP growth forecast for 2018 marginally higher. Whilst the increase was only by 0.1%, the mild revision of growth from an annualised 1.4% to 1.5% was enough to contribute to Sterling’s appreciation of around 0.62% against the Dollar. After all, 0.1% of GDP is a spare 20 billion Pounds or so in the economy! However, upon wider examination, the story is not all it may seem:

 

The Chancellor’s announcement coincided both with the dismissal of Secretary of State Rex Tillerson and the publication of underwhelming US consumer price inflation. On a trade weighted basis, the Pound barely scraped through a 25 basis point appreciation. Moreover, the momentum behind the appreciation seemed far less convincing, and was significantly eroded by close of play in Europe this afternoon.

 

 

 

 

Discussion and Analysis by Charles Porter

 

 

Click Here to Subscribe to the SGM-FX Daily Newsletter

 

 

 

 

Euro Blip

 

The European Central Bank has done very little to benefit the Euro in the past days and weeks. Following the ECB Bank Rate decision on the 8th March the Euro has underperformed. The rhetoric that emerged during the early afternoon press conference following the monetary policy decision has been sustained by a number of central bank speakers recently.

 

This morning alone, ECB President Mario Draghi spoke publicly in Frankfurt. The Euro reacted negatively following Draghi’s speech, while markets priced in his comments surrounding the cessation of Quantitative Easing and inflation. The asset purchase program (QE) is weighing on the value of the Euro as the central bank continues to flood markets with cash. The ultra-loose monetary policy that currently pervades throughout the Eurozone has been tightening, albeit very slowly.

 

The take away message from Mario Draghi this morning was that as much as the ECB feels it is time to wrap up the sustained increase in net asset purchases, inflation is simply not there to facilitate the change. When considered amongst its G-10 counterparts, the Euro appears as a definite laggard, allowing Sterling to appreciate to €1.13 to the Pound.

 

 

Discussion and Analysis by Charles Porter

 

 

Click Here to Subscribe to the SGM-FX Daily Newsletter

 

 

For The people…

… Not for the Rand!

 

The political overhaul in South Africa is mesmeric. The entrenchment of the previous incumbent regime throughout society, trade and politics was hard to understate. The release of the African National Congress from the grips of Zuma and his family afforded the Rand considerable value, propelling the Rand down from above 19 to the Pound, to below 16 upon a few occasions in February.

 

However, the new leadership of the African National Congress scared the international market somewhat when it endorsed land expropriation without compensation. The reaction within the Rand looks to have been negative, dragging the Rand away from its lows in the 15s against the Pound and firmly into the mid-range of 16. Whilst the declaration has been met with little less than ridicule on the international stage, the salience of land and the underlying message might not be so bad for the domestic currency, perhaps explaining its moderated depreciation following the declaration:

 

The appreciation of the Rand following the departure of former President Zuma and accession of Cyril Ramaphosa was largely symbolic of the end of corruption and an introduction of the potential for reform. So long as the change of power had remained largely symbolic, the Rand would have gradually lost its footing against its international counterparts as markets repriced the political integrity of the (un)reformed South African regime.

 

However, declaring that land expropriation is on the cards and in the favour of the people does suggest that the newly inaugurated regime does have the commitment to change the deck. Therefore, there does, in my opinion, remain upside within the Rand in the medium run from political roots. With respect to economics, the reading of Consumer Price Inflation next week will be an event that creates significant risk for the Rand. The publication will largely frame the subsequent monetary policy decision that will be publicised within the week commencing 27th March 2018. As disinflationary pressures look to be disappearing more and more within the domestic economy, this event will be important to the consolidation of the Rand’s recent fortune.

 

 

 

 

Discussion and Analysis by Charles Porter

 

 

Click Here to Subscribe to the SGM-FX Daily Newsletter

 

 

SGM-FX office view

Morning Briefing

As Brexit dominates the Pound, economics and monetary policy dominates the Dollar, and political scandal dominates the Rand, FX markets may start sounding like a broken record. However, one should remain very much aware that this repetition and almost paradigmatic taxonomy of certain currencies is more fragile than it may seem. Even the slightest amelioration or deterioration of the current situation could have phenomenal or catastrophic consequences for the respective currency. The Dollar has been the unquestionable winner so far this week as markets reprice their approach to the Chairmanship of Jay Powell. Sterling meanwhile has been caught in the doldrums, threatened by a Dollar that currently trades at 1.3750 against the Pound and 1.1280 against the Euro. The Rand has weakened off mildly following a disappointing and somewhat frustrating cabinet reshuffle. The Rand now trades close to 16.40 against the Pound, 11.92 against the Dollar, whilst clinging on just above 14.50 against the Euro.