The Pound initially recovered its post-Christmas losses this morning. Moreover, marginal volatility appears to have returned to foreign exchange markets. On the final trading day before 2018, the EUR-USD currency cross continues its impressive attempt to retest 1.20. The currency pair broke this level in September, and presently trades just 8 pips short of the milestone. The present range sees the Euro trading at its highest value against the Dollar for almost three years. On a trade-weighted basis, the Dollar has concluded its worst year since 2010, with the Euro boasting its best performance this decade. Despite being enveloped within a weak post-Brexit paradigm, Sterling has not performed too badly in 2017.
Sterling Briefing: Confined Hawkish Brexit Attitudes
Sterling’s appreciation this morning has been largely unilateral, pervading across each of the G10 currencies. The re-balancing has provided a plethora of conjectural, post-hoc explanations. However, the appreciation appears once again to be little more than a few big players in a low liquidity market, operating with a currency that has become under-valued in the ultra-short-run.
International investors are being drawn to the UK market by the over pricing of Brexit uncertainty. However, the attraction appears to be largely limited to the acquisitions space. The prices of assets is being excessively suppressed to account for the uncertainty of Brexit. However, this revelation shows no evidence, either formally or informally, of spilling over into the currency markets. The absolute volume of acquisition deals is insignificant enough to alter the aggregate demand for the Pound and thus raise its equilibrium value. What would be required instead is the extension of optimism to high volume FX firms.
There remains upside potential for the Pound Sterling in 2018, especially if a threshold of Brexit progress is achieved that will facilitate a rise in confidence. However, whilst I do believe 2018 holds considerable and underestimated upside potential to the Pound, the undeniable dynamic of ‘nothing is agreed until everything is agreed’ will continue to diminish the significance of tangible Brexit progress.
Euro Briefing: Macron’s Reform:
Market commentators are asking the wrong questions. Inevitably, they are therefore reaching the wrong conclusions, with potentially devastating results for the valuation of the 2018 Euro. Macron’s reforms are being praised by economists for providing the potential for long-run economic growth. Be this justified or erroneous, this variable is insignificant in comparison to the attitude of the reforms with respect to the Euro.
French President Emmanuel Macron was a centrist candidate in the recent elections with one key differentiating factor; an infatuation with Europe and campaign image dichotomous to that of far-right and anti-Eurozone candidate, Marine Le Pen. The series of particularly pro-European reforms delivers considerable value to the Euro in light of one of the biggest political risks of 2018: Italy.
The Italian elections, scheduled for 4th March, are being framed by the very same economists and political risk analysts as a significant threat to the stability and unity of the Eurozone. Having a systemically pivotal Eurozone member off-setting this risk with leverage within the Council should be valued higher.
Dollar Briefing: Tax Insight
Tax reform is framed as mildly positive for the economic outlook of the United States, despite presenting a significant challenge to Federal fiscal responsibility. The positive economic outlook will provide support for the Dollar, however, there is a more tangible effect: the immediate (Q1) repatriation benefit from tax relief will see a considerable increase in the demand for Dollars. However, the wider 2018 consensus is for a bearish Greenback.
The Turkish Lira lost in excess of 16% against the US Dollar between September and December, only stemmed this month by systemic Dollar weakness. The devaluation was supported by President Erdogan’s controversial reforms and deteriorating tolerance on the international stage, shown by the US suspension of visa-relationships. The Christmas period has, however, seen visa agreements return, restoring over 1% of the Lira’s value. USDTRY = 3.791.
Discussion and Analysis by Charles Porter