Expat Currency Corner
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22nd February 2018 – Expat Currency Corner Euro News:
Spain’s candidate, Luis de Guindos, for vice-president of the ECB has accepted the role and is therefore expected to replace Portugal’s Vitor Constancio, when his eight-year term ends.Luid de Guidos, the Spanish economy minister and former Lehman Brothers banker, was the only candidate left, following the bowing out of Ireland’s central bank governor, Philip Lane. This is the ECB’s first appointment of four needed to complete the ECB’s executive board, including the positions of president and chief economist. Despite having no monetary policy experience, de Guidos said that the nomination showed that Spain has regained “much prestige” in terms of monetary policy since it lost its seat on the ECB executive board during the sovereign debt crisis.
Italy’s national election is on 4th March 2018, and with the campaign in its final weeks, the issues surrounding the election are coming to light. With most parties focused on the contentious issue of immigration, some pollsters have argued that the most important issue for voters is the economy. Despite the government arguing that “the worst is over” following fourteen quarters of positive growthm for the average Italian, it seems tha the country is still struggling following the sovereign debt crisis. The Italian economy is six percent smaller than in 2008, even though the Eurozone’s output has grown by five percent over the same period. Italy’s underperforming economy has meant that many Italian’s are now living in poverty, aiding the rise in right-wing, anti-establishment parties such as the 5-Star Movement, which looks to come out as the largest single party.
Roberto Perotti, a former government adviser, said, “the rise in absolute poverty is a very Italian problem.” There are reportedly 4.7 million Italian’s living in absolute poverty; a three-fold increase since 2008. Italy has one of the highest unemployment rates in Europe, at 10.8%, with youth unemployment even higher at 46.6%. This lack of job availability and opportunity is fueling a mass migration of Italians to other European countries; up 60% between 2016 and 2017. The lack of opportunity in Italy is also powering the fall in births in Italy, with the birth rate falling by 22% compared with 2008 levels.
The discontent within Italy has forced parties to make expensive pledges to help them out of poverty. Former president Berlusconi’s centre-right bloc has pledged to increase the minimum pension to €1,000.00 and bring in a lower pension age. The ruling Democratic Party, has also pledged to increase the minimum pension amount to €750.00 while also giving each family €400.00 a month, per child, for four years. The front-running 5-Star Movement has proposed a monthly universal wage of up to €780.00 a month for those living in poverty. Despite proving popular with the voters, these policies have faced some criticisms for embedding poverty, and discouraging people from finding work.
The Euro has enjoyed a steady week ahead of the election, against the Pound, the Euro weakened by just over 1.1%, from lows of 1.1220 to highs around the 1.1350 mark, although it is now trading closer to the 1.1300. Against the US Dollar, there has been more movement over the last couple of weeks, with a movement of over 2.7%, trading at lows of 1.2250 and then moving to highs around the 1.2540 mark. This has since corrected itself and is once again trading at levels closer to 1.2280.
20th February 2018 – Expat Currency Corner South Africa News:
Following ten years in power, South African President, Jacob Zuma, officially resigned from office, merely hours after vowing to keep his position until the end of his term. The comments came a week after the African National Congress’ fight to oust Zuma from office became more forceful and concentrated. The decision by the ANC to support the opposition’s motion of a no-confidence is unprecedented. Zuma is said to fear prosecution following his premiership being fraught by corruption scandals, surrounding prominent South African family, the Guptas.
Parliament immediately swore in Cyril Ramaphosa to office, following Zuma’s resignation. Inheriting a declining economy, fractured political class and a population unsatisfied with current levels of poverty and unemployment, Ramaphosa is facing high expectations from all to deal with these issues. Pledging to uproot the epidemic of corruption in all levels of government, he has already begun overhauling state-owned entities. Sorting this, analysts say, will be the deciding factor in growing the economy. With unemployment at its highest rate since 2003, at 27%, and 50% of the population living in poverty, dissatisfaction is at an all-time high within the population. According to tax records, a tenth of the population, a predominantly white minority, own 90% of the wealth in the country.
Zuma’s departure from office has been hailed as the ANC’s last chance to get it right. Jacques Pauw, the author of the book ‘The President’s Keepers’, said, “under Zuma we were on the brink of becoming a mafia state … once your in a mafia state it’s very easy to become a failed state.” Ramaphosa has taken over a fractured party; one where even the top six officials are split. The power Zuma abused, and subsequent damage done on the country, will be hard to repair.
Markets reacted strongly to the news that Ramaphosa has taken office. Against the pound, the Rand strengthened by over 3.2%, from highs of 16.65 at the beginning of the week to lows of 16.1250. This weakening then corrected to levels closer to 16.4250. Against the US Dollar, the Rand strengthened by over 3.6%, from highs of 11.9750 to lows of 11.55. This, again, corrected itself to levels of 11.7250.
08th February 2018 – Expat Currency Corner Interest Rate Decisions:
The interest rate is a monetary policy tool used by central banks to manipulate the macroeconomy. Representing both the reward for saving and the cost of borrowing, interest rates can manipulate the attractiveness of prospective domestic currency exposure.
Ubnsurprisingly, the Bank of England decided not to raise interest rates this month. They decided instead to develop their answer to the questions surrounding when the next hike will be, saying that earlier rate hikes should be expected to curb the effects of a strong global economy on the UK. The statement, appearing hawkish, said that the central bank was no longer willing to tolerate inflation above its targeted 2%. This was repeated in a letter to the chancellor, with Mark Carney, BoE govenor, sayign that “monetary policy would need to be tightened somewhat earlier and by somewhat greater extent over the forecast period than anticipated at the time of the November report”, if the bank’s predictions were correct.
The language used in the press conference following the speech mirrored that used in September’s Monetary Policy Committee minutes. This was followed, immediately, by a rate hike to 0.5%, leading investors to expect a rate increase as early as May. There have been no specifics, in either the minutes or the letter to the chancellor, on what the bank felt was now needed in terms of the number, and size, of rate rises. However, Carney previously called for two to three further rate hikes in the next three years. This looks most likely to change due to the fact that inflation would overshoot the BoE’s target if there was only one rate hike a year for the next three years.
The Federal Reserve, in the United States, is likely to raise interest rates much faster than the market had previously expected this year. The anticipated rise to 3.25% by year end considerably exceeds the 3% that was priced into the market only one year ago. Surpassing market expectations once again, ratings agency Fitch forecasts four hikes in 2018; as much as double what the dominant market expectations previously predicted.
James McCormack, who oversees Sovereign ratings at Fitch, said “our impression of the Fed is that it wants to get on with this, and the rationale for leaving rates lower for longer disappeared. It will take something unexpected to interrupt the path of higher rates lower for longer disappeared. It will take something unexpected to interrupt the path of higher interest rates. We are not anticipating that, so we expect rates to move higher than the market expects they will.” He added, “at some point, the risk of doing too little is greater than the risk of doing too much.”
Despite all the positive news surrounding rate hikes in the US, the equities sell off this week has projected the market’s less optimistic view of the Fed’s activity. Markets are now pricing in three rate hikes to a threshold beyond the 50th percentile. March is still a big contender for the first hike, priced in at 71.9%. June, however, is looking far less likely to be the second hike, dropping from 60% to 50.3% within one day. The front loading of expectations has led September to become the biggest contender, with markets pricing in an interest rate hike that month by 72.9%. The outlook for a third hike is much more bleak, with December down to 44.3% from a previous 63%.
The European Central Bank’s position is much easier to predict, with President Mario Draghi confirming interest rates will be kept at 0.25% until their quantitative easing program has been fully tapered. Recent comments from ECB officials have signalled to investors that QE will be cut faster than expected.
Derived from an increased confidence in the recovery of the global economy, more hawkish signals came from the ECB’s December rate-setting meeting minutes. With its characteristically subtle language, the repricing of expectations was largely led by a semantic change of discussion of the Union’s “recovery” to Europe’s “expansion”. Minutes also made very clear that the council was already reassessing the economy’s “robust and self-sustaining” expansion.
The pound strengthened against the Euro and the US Dollar following the BoE’s decision not to raise rates. Against the Euro, the Pound rose by over 1%, trading at highs of over 1.1430, before dropping off slightly to levels closer to 1.1370. Against the US Dollar, the Pound rose by over 1.5% to highs of 1.4060, again, before moving down to levels closer to 1.1391.
06th February 2018 – Expat Currency Corner Brexit News:
The City of London will not get the deal it was expecting, following reported confidential discussions among the other 27 member states. The deal, which would see financial services being given a separate “passport” to the EU, has been shot down by EU negotiators who have argued that a “smaller City of London” would benefit the bloc.
Financial services make up 80% of the UK’s GDP, while also providing the UK’s largest export and tax revenue stream. It is no surprise that protecting the City is one of the UK’s top priorities in Brexit negotiations. While the EU believes the 27 will flourish with a smaller City, May has argued the opposite, saying that damaging the City would adversely affect the stability of European financial services and contribute to a fragmentation of the industry.
Talks are moving towards the future relationship between the UK and the EU this morning. Michel Barnier, the EU’s chief Brexit negotiator, has warned Britain to start making decisions on the type of relationship it wants post-Brexit. Britain has dismissed the option of staying within the customs union while also looking to remove itself from the the current single market, opting for an individally tailored agreement. Barnier told reporters that “without a customs union and outside the single market, barriers to trade on goods and services are unavoidable. Time has come to make a choice.”
Markets have reacted strongly to the start of talks, with Pound Sterling down by almost 2% against the Euro, trading around its lowest point since mid-January, and over 2.3% against the US Dollar, breaking the 1.40 mark for the first time in 2 weeks.
17th January 2018 – Expat Currency Corner US Dollar News:
The outlook for an agreement between Donald Trump and the Democrats being formed is becoming increasingly pessimistic following divisive comments made by the POTUS last week. Accusing the Democrats of threatening to shut down the government, the two sides are moving further and further apart with immigration proving to be the most contentious battle ground.
Trump’s reportedly branded the US’s international counterparts with detrimental remarks, in comments that have not been taken kindly by most of the domestic or international world. A discussion on funding to keep the government running has become entangled in a debate on immigration. Many democrats are calling for a spending plan to protect those in the Deferred Action for Childhood Arrivals, DACA, a programme to deter the deportation of people who entered or stayed in the country illegally for two years.
The House and the Senate have 3 days to agree to a deal on public spending, otherwise the government will go into shutdown. Last time this happened, in 2013, it lasted 16 days and equated to federal staff taking 6.6m days of unpaid leave between them.
Yesterday, aides are reported to have said that the most likely outcome of proceedings is for a short-term spending package, that includes current levels of spending until 16th February; a little over 4 weeks’ time. This would, however, leave some issues unresolved, such as the future of DACA beneficiaries and funding ofr Trump’s proposed border wall with Mexico, as well as decisions surrounding defence and non-defence spending, imposed by the 2011 Budget Control Act.
The US Dollar has weakened by close t 3.8% against the Pound Sterling; a move not seen since the beginning of 2017, around Trump’s inauguration. Against the Euro, the US Dollar weakened by almost 4.4%, moving from 1.1750 to levels closer to 1.2250.
11th January 2018 – Expat Currency Corner Brexit News:
“It takes two to tango”, were Philip Hammond’s words of choice to the EU when pleading with them to show more eagerness to shape the post-Brexit trade deal. The pro-EU British Chancellor has implored the EU to show areas of potential compromise, adding that the EU has yet to signal the relationship they would like with post-Brexit Britain. The UK was asked to spell out what they wanted from the future relationship, while Hammond’s request for a bespoke deal was met with a sour response from EU officials. “We were pleased they’d finally dropped it and now it’s back like a zombie,” one official said.
Britain has been presented with two choices to retain access to the single-market, both of which are described as a ‘soft’ Brexit. Both the Norway-style access, with the UK becoming an EFTA member, and Canada-style access, giving the UK free market access across most sectors while excluding key industries, have been put on the table. Prime Minister Theresa May has attempted to rule out both options, saying in her Florence speech, “we can do so much better than this.”
The Pound has strengthened against the Euro by almost 1.3% last week, to highs of almost 1.1350. This has corrected itself, with levels trading closer to 1.1290-1.13. Against the US Dollar, the Pound has weakened by almost 0.8% but is still trading at one of its highest points since the Brexit referendum.
30th November 2017 – Expat Currency Corner Brexit News:
Arguably the biggest hurdle in the Brexit negotiations has finally been overcome, with Britain agreeing to fulfil its financial commitments to the EU. Brussels have identified the figure at £100bn, however, when contributions are taken into account, the net figure is less than half of that. Prime Minister, Theresa May, is expected to formally present the offer at the summit on the 15th December, with the aim of reaching a “sufficient” progress within talks. “They have promised to cover it all, we don’t care what they estimate it is,” said an EU diplomat, adding “we are happy to help them present it.” Despite this, both the UK and Brussels have confirmed that no final figure for Britain’s settlement will be agreed next week.
The increase in Britain’s settlement was backed by the cabinet, on the condition that there would be a good trade agreement attached to it. May originally offered €20bn (£18bn) in her Florence speech, an amount that was immediately rejected as too little by Brussels. Negotiations have heavily centred around the “Brexit bill”, with Brussels originally estimating a net amount of €60bn. The British government is working to reduce this amount, which will also take into account the value of the Pound, the rebate for Britain’s 2018 budget and the British economy’s relative smaller size. “Intensive talks between the UK and the European Commission continue to take place in Brussels this week as we seek to reach an agreement,” a spokesman for the Department of Exiting the European Union said. He added, “We are exploring how we can continue to build on recent momentum un the talks so that together we can move the negotiations onto the next phase and discuss our future partnership.”
Sterling reacted to the news and was trading 0.5% higher, trading at 1.34 levels, against the US Dollar on Wednesday morning. It was strengthened against the Euro, trading in the 1.12s and rising 0.2%.
29th November 2017 – Expat Currency Corner US Dollar News:
The USA has once again been antagonised by North Korea following the successful launch of a new advanced ballistic missile. North Korea has claimed that the missile can cover the whole of the US, and comes after a 75-day pause in missile tests. The rocket reached an altitude of 4,500km, 10 times that of the International Space Station, and spent 53 minutes in the air. This suggests that it could range almost all of the US, were it to be launched at a lower trajectory. Jim Mattis, US defence secretary said, “It went higher, frankly, than any previous shot they’ve taken,” adding that the North Korean leader now has the ability to hit “everywhere in the world.”
Claiming themselves to be a “complete” nuclear state, Kim Jung Un, the North Korean leader, was quoted in a televised statement referring to the missile as “Hwasong 15” and the “most advanced missiles so far.” This has exacerbated claims that it could cover the whole of the US. “We have finally realised the great historic cause of completing the state of nuclear force”, Kim Jon Un declared, proudly.
North Korean officials have claimed the development of nuclear missiles – long-range missiles with a nuclear device – were to deter the US from action against them. Several US and South Korean officials, however, believe that North Korea’s intentions are more offensive, than defensive. South Korea’s president, Moon Jae-in, has sworn to employ further sanctions on Kim Jong Un’s republic following the launch. “North Korea must immediately give up its reckless pursuit that will lead to its isolation and demise,” he said, adding that “the government will not tolerate North Korean provocation.”
Donald Trump, US president, said, “We will take care of it. It is a situation we can handle,” following a discussion with Moon, where they both discussed the “great threat” posed by North Korea. Although Trump has confirmed that his government’s stance towards North Korea will not change. It was also confirmed that president Trump spoke to Shinzo Abe, Japan’s Prime Minister, after Japanese officials claimed a launch could be imminent. Trumps relationship with the North Korean leader has been historically hostile, with Trump referring to the Chairman as “Rocket Man”, while implying he was “short and fat”. In retaliation, the supreme leader has been known to call Trump “a lunatic old man”. Trump also warned, in a UN speech in September, that the US would have “no choice but to totally destroy North Korea.”
Despite the panic the last missile launch caused across the entire currency market, and following the two-month lull in North Korean aggression, expectations were shattered when markets failed to move for the dictator. Safe havens remained stable, neither strengthening nor weakening particularly. Asian trading was particularly unmoved, with European trading following suit. The US Dollar weakened by a mere 0.29%, against the Euro, by market open the next morning. It has since, however, recovered to levels similar to those before the launch. The implications of the launch have been mainly political, with markets seemingly taking little notice of the event.
28th November 2017 – Expat Currency Corner Emerging Markets News:
South Africa’s credit rating for its local and foreign currency bonds were downgraded to ‘junk’ status on Friday, by S&P Global Ratings agency, following credit agency Fitch’s decision to also downgrade the bonds the day before. They narrowly missed the same fate from Moody’s, who instead put them on review for a downgrade, pending the 2018 budget. The S&P downgrade proved enough to remove South African local currency bonds from Barclays Capital Bond Index, while Moody’s saved it from being expelled from the Citi World Government Bond Index. S&P reported that weak economic growth has led to worse than expected public finances, as well as unstable politics exacerbating the problem. The report said, “a momentous political agenda had overshadowed policy making, despite the deteriorating economy and weakening public finances.”
Moody’s decision to leave south African bonds rating as they are – for now – has allowed the bonds to remain in key global bond indices. However, it has been argued that the yield of South African local and foreign currency bonds is suggest the assumption that Moody’s will downgrade them. Moody’s currently rate the bonds one notch above junk. Zuzana Brixiova, lead sovereign analyst for Moody’s, said the review was due to the country’s fiscal and economic problems being worse than the agency had previously understood. “Both low investor confidence and limited progress on structural reforms are rooted in uncertainty created by the fluid and unpredictable political environment,” Brixiova said. She added, “Unclear and shifting policy objectives, political manoeuvring and frequent changes of leadership in key ministries, and concerns over the pressures on the key policymaking institutions such as the Reserve Bank and the National Treasury, have weakened South Africa’s economy, finances and institutions.”
There is was a panic sell-off ahead of the announcement, with Rand weakening by 2.08% against the Pound Sterling, moving from the 18.50s mark to levels in the 18.80s. This was corrected at market open more than expected, with the Rand strengthening against the Pound by 2.5%, and moving into the 18.30s.
27th November 2017 – Expat Currency Corner Brexit News:
Two large pharmaceutical companies have quickly become Theresa May’s saving grace, giving her post-Brexit economy a boost it so desperately needs. German-based companies, Qiagen and MSD have revealed more than £1bn of investment in the UK. The news comes days after the decision to move the European Medicines Agency from London to Amsterdam. PM May is also attempting to reassure businesses about the UK’s prospects once the UK has left the EU by publishing her industrial strategy.
By 2020, MSD is set to develop a research facility in London, creating 950 jobs, designed to develop new drugs. This includes 150 research roles that are meant to attract “the best and brightest” scientists from around the world according to the company. Qiagen is also investing hundreds of millions of pounds to establish a campus in Manchester, creating up to 800 jobs and ensuring the government’s aim to extend post-Brexit prospects to the whole of the UK.
The Irish border has become the most contentious issue standing in the UK’s way to progressing through Brexit talks. With the inevitable question on what it will look like, Westminster has insisted that there will not be a hard border between Northern Ireland and the Republic of Ireland. Trade Secretary, Liam Fox, has come under the spot light for maintaining that issue cannot be finalised until a trade agreement has been made.
The Secretary of States’ comments come merely weeks before EU leaders are set to decide whether there has been “sufficient progress” made, in order for negotiations to move on. Fox’s comments have proved divisive due to the EU’s insistence that the border issue must be resolved before the next round of talks. Irish Christian Democratic Member of the European Parliament, Mairead McGuiness, said she was troubled by the comments. The Republic of Ireland has full support from the EU27 that it will not accept a hard border with Northern Ireland, while the UK is expected to come up with a workable proposal.
Sterling strengthened against the US Dollar this past week, rising 1.39%. GBPUSD, ‘cable’, has traded between highs of 1.3378 and lows of 1.3192. It wasn’t all highs for Sterling, however, as it weakened against the Euro this week. It reached highs of 1.1302 while also experiencing lows of around 1.1160, achieving a volatility of 1.29% over the week.
24th November 2017 – Expat Currency Corner Euro News:
Germany’s Social Democrats have said that the party is ready to re-open talks with Angela Merkel’s conservative bloc, according to leader Martin Schulz. He has confirmed, however, that any decision would have to be put to the SPD’s members. This marks a U-turn for the leader, who pulled out of talks last Sunday, plunging Germany into an unprecedented political crisis. Schulz advocated new elections, following the SPD’s worse than expected results in September, and denied the possibility of re-joining Merkel’s “grand coalition”. The SPD are able to break the political stalemate in Berlin, however, Schulz has made it very clear that any decision will be put to the party’s members. “If the talks lead to us taking part in forming a government, whatever form or constellation it should take, the members of our party will vote on it,” he said this afternoon, in a televised statement.
Schulz has been under increasing pressure to reverse his stance on re-joining the coalition, especially since the Free Democratic Party withdrew from talks with Merkel, plunging Germany into unprecedented political uncertainty. In his statement today, he said, there would be “nothing automatic, in any direction”, not committing his party to any one decision on joining the Merkel-led minority government again. A number of SPD officials have shown interest in re-joining the coalition, adding to Schulz’s outside pressures. Stefan Zierke, an SPD member, said “if you want to implement projects, if you really want to move forward social democracy in Germany, then you have to be in government.” There has, however, been a backlash from other SPD members, who remain discouraged from joining the coalition. They blame the decision to join the coalition as the reason for their disaster at the September election, where they won only 20.5% of the vote.
Despite the initial ‘panic’ sell off in Asian trading following the breakdown on talks, general consensus is that the political crisis in Berlin has had very little impact on the Euro. Countered by positive data released in the week showing the strength of the economy, the Euro has strengthened against the Pound Sterling, moving 0.65% throughout the week, with highs of 1.13 and lows of 1.117. The Euro also strengthened against the US Dollar by 1.75% throughout the week, finishing on a high of 1.194.
22nd November 2017 – Expat Currency Corner Emerging Market News:
The Turkish Lira has weakened against the US Dollar, to its lowest level ever, while Turkey’s government bonds have also fallen to their cheapest level ever recorded. Investors are said to be deterred by the increased tensions with the US and doubts around whether the central bank is able to curb inflation. The US has been accused of creating a “clear plot against Turkey” by a Turkish government official spokesman.
Inflation has reached its highest level in 13 years, with annual food inflation recorded at 12.7% and transportation costs reportedly rising to 16.8% in the latest inflation report. The worse-than-expected data came very soon after central bank Governor, Murat Cetinkaya, warned of a two-month inflation acceleration through October and November, due to a weak Lira and rising oil prices. He added, however, that the banks current monetary policy stance was tight enough to meet the bank’s official, long-term target of 5%.
A number of Turkish citizens have been accused of breaching sanctions against trading with Iran. Included in this was gold trader, Reza Zarrab, and a number of top Turkish officials. They have been accused of being involved in a system to bypass anti-Iranian sanctions by trading billions of dollars of gold.
Zarrab’s accusation and subsequent trial, set for next week, has increased tension between Turkey and the US. Reuters have reported that a government spokesman has said that the case “aims to damage Turkey’s ties with Iran, Russia and other countries. The Lira is trading 2.2% weaker this week alone, currently trading at 3.91 against the US Dollar. The Lira’s weakness has been exaggerated by President Recep Tayyip Erdogan’s attempt to increase his power in January, scaring off investors.
21st November 2017 – Expat Currency Corner Brexit News:
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.
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.”
May is expected to wait until the last possible moment before making her improved financial offer and is holding off on the offer in order to gain the most leverage in negotiations.. She 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” while hoping the increased offer to help open talks on the transition deal and trade agreements.
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.
20th November 2017 – Expat Currency Corner Euro News:
The prolonged struggle for Angela Merkel to form a government under her leadership collapsed last night. Christian Linder, leader of the centrist Free Democrats party, the FDP, announced just before midnight that the party was pulling out of talks with Merkel’s conservative alliance. He said that the parties had been unable to see past their differences on policy and had been unable to develop “a basis for trust and a shared idea.” He later said “it is better not to govern than to govern badly.” Merkel, and the other party leaders, however, claimed that a coalition deal would have been possible, insinuating that the FDP was responsible for the breakdown in talks.
The deadlock marks a break away from the vision of political stability and certainty Germany prides itself on. Negotiations, which became increasingly acrimonious, faltered on a number of different issues. Merkel’s divisive immigration policy caused friction within talks, with the current liberal refugee policy at odds with the more conservative ideals from the FDP. Europe’s largest economy is now set to face an unprecedented political crisis amongst the increasing prospect of new elections. Following disappointing election results in September, the anticipated coalition was Merkel’s last and only shot at forming a new, majority government. Merkel’s last option is to form a minority government with the Green Party, however, she has indicated that she is opposed to this due to the instability it would cause.
The breakdown in talks has also put Europe’s longest serving leader in trouble, as it is not certain that Merkel’s party will want her to lead them into a new campaign. It is likely debate will now focus on Merkel herself, and whether she commands enough power and influence to continue to hold together a strong government. Top selling German newspaper, Bild Daily, said the failure to forge an alliance, nicknamed the “Jamaica coalition” due to the parties colours matching those of the Jamaican flag, put “her chancellorship in danger.”
The Euro took a tumble following the announcement, trading 0.5% lower against the US Dollar and taking the Euro to its lowest level in four days. The Euro was also down 0.6% against the Japanese Yen, to a two-month low, and was down 0.43% against the Pound, trading at 1.125.
17th November 2017 – Expat Currency Corner Asia-Pacific News:
Despite the Australian economy adding fewer jobs than expected, unemployment data fell to its lowest level since February 2013. According to the Australian Bureau of Statistics, the seasonally-adjusted unemployment rate fell by 0.1 percentage points in October, from 5.5% to 5.4%. Unemployment was expected to stay at 5.5%, having been stuck between 5.5% and 6% for the past two years, falling from a peak of 6.4% in October 2014. A net 3,700 jobs were added in October, well below the 17,500 Reuter’s forecast. This translates to roughly an increase of 24,300 full time jobs being added and 20,700 part-time jobs being eliminated. The rise in full time jobs has been reflected in the rise of hours worked, up by 0.3%. The Australian currency was 0.1% stronger, with the Aussie Dollar trading at $0.7595 against the US Dollar in the morning session, following a brief dip to as low as $0.7968 immediately after the release.
The Japanese economy grew at an annualised rate of 1.4% in the third quarter of this year. The country is experiencing its seventh consecutive quarter of growth, as well as recording its longest run of uninterrupted expansion since 2001. Despite growth being slower than in the second quarter, it is still far above Japan’s long-term trend of 0.5%. The growth suggests that Japanese Prime Minister, Shinzo Abe’s, dovish policies seem to be successfully working towards creating inflation. “Household incomes continue to grow at a solid pace and external demand is holding up,” said senior economist, Marcel Thieliant. “However, the economy is running into capacity constraints which suggest that growth will start to slow next year.” While both business and public investment offered very little to the expansion, the quarter was rescued by trade and inventory building. Net exports contributed 2% to growth, with overseas sales boosted by a weak Yen. US Dollar-Yen variance was 2.78% over the month, with the Yen losing value against the Dollar. Aided by a weakening Dollar, the Yen recovered rapidly from the start of November, and the Yen now trades at similar levels to the 19th October.
14th November 2017 – Expat Currency Corner Euro News:
The Euro rose today, following a boost from stronger than expected German GDP data. Growth was up to 0.8% when measured from the previous quarter, more than the expected 0.6%. This performance was a result of export led growth, as well as strong trade and investment. The data was the most recent sign of strength from the bloc’s powerhouse, and the latest evidence of the acceleration of the Eurozone’s biggest economy, reinforcing the case for the European Central Bank, ECB, to begin tightening monetary policy. Growth is up 2.3% compared to a year ago, and is growing at its fastest pace since 2011. Foreign trade is a major factor driving growth, with exports increasing faster than imports. The Federal Statistics Office said, “While state and household consumption remained roughly on the previous quarter’s level, gross capital investment contributed to overall growth … investment in equipment, especially, rose on the quarter.” The Euro has hit a three-week high, the highest rate since 26th October, when the ECB decided to extend its Quantitative Easing programme to September 2018.
This news came less than a week after the Berlin government’s Council of Economic Advisors warned that the economy was in danger of overheating. The council, composed of five top economists, have called for the country’s next government to pursue economic reforms to ensure that the boom does not end in ruin. The council warned that above trend growth and low interest rates threatened the to create a property bubble, while increasing risk within the country’s financial systems. “We’re in this low interest environment that has been going on for a long time, and so there is good reason for these high prices [for property],” council member Isabel Schnabel said in Berlin. “But when the interest rates rise again, these prices could go very quickly in the opposite direction.” In its annual report, the council projected a 2.2% growth in Germany’s economy. The council considers Germany’s long-term potential growth rate – the rate at which Germany can grow without creating negative effects to inflation and markets – to be 1.4%.
13th November 2017 – Expat Currency Corner Brexit News:
The pound is facing some downward pressure today, losing more than 0.6% against the Euro and down almost one cent against the US Dollar, due to PM Theresa May’s supposed weakness emerging over the weekend. As many as 40 MPs have agreed to sign a letter of no confidence in May, while prominent cabinet members, Boris Johnson, Foreign Secretary, and Michael Gove, Environment Secretary, have sent a leaked letter to her reportedly telling her how to run Brexit. May’s position looks increasingly fragile.
It emerged over the weekend that as many as 40 MPs have agreed to sign a letter of no confidence in Prime Minister May. This is close to the 48 needed to trigger a vote of no confidence which, if lost, could lead to a Tory leadership contest. The crisis started following May’s chaotic conference speech, when 35 MPs agreed to sign a letter of no confidence, leading to a failed coup. Since then, the problems have only increased for May: the Westminster sexual harassment scandal; resignations of cabinet members, Sir Michael Fallon and Priti Patel; and Boris Johnson’s blunder leading to a British dual-citizen being threatened with a longer prison sentence in Iran. Coupled with the continuous schism within the Government over Brexit negotiations, markets appear to fear that May is losing control.
Meanwhile, Foreign Secretary, Boris Johnson, and Environment Secretary, Michael Gove, have sent a leaked letter to May, reportedly instructing her on how to run a hard Brexit and expressing their discontent with the current Government response. They wrote that they “are profoundly worried that in some parts of Government the current preparations are not proceeding with anything like sufficient energy.” The letter also said that transition arrangement must end by 30 June 2021, and made a thinly veiled attack on Chancellor, Phillip Hammond. A government source told the Mail on Sunday newspaper that Johnson and Gove had attempted a “soft coup” and described May as their “Downing Street hostage”. While neither has commented on the report, the letter suggests both men have set aside their differences after last year’s Tory leadership contest.
10th November 2017 – Expat Currency Corner US Dollar News:
US Jobless data was released yesterday, with more people claiming unemployment benefit in the United States than last week. Initial jobless claims were up 10,000, hitting 239,000, from last week. Unemployment assistance claims were only expected to rise by 2,000 to 231,000, therefore, the release exceeded market expectations. Claimant levels fell to their lowest since the 1970s the week prior, and remain well below the 300,000 mark that signals a healthy labour market and economy.
It should be noted that the Labor Department is now processing backlogged claims following the disruption caused by the hurricanes in Puerto Rico. This means that the data could be inflated and inaccurate. While operations in the Virgin Islands remain severely disrupted, there could be further inflated and inaccurate data released. Although there was immediate US Dollar strength following the data release, this was corrected within the hour.
American President, Donald Trump, is now coming to the end of his 11-day Asia trip. Trump spoke in the Vietnamese city of Da Nang today, at the annual Asia Pacific Economic Cooperation meeting. Whilst praising many nations for achieving remarkable economic success over the last few decades, he used the opportunity to revive his campaign stance that the US had been treated unfairly in terms of trade. He said, “I will make bilateral trade agreements with any Indo-Pacific nation that wants to be our partner and will abide by the principles of fair and reciprocal trade.”
The speech followed Trump’s 2-day visit to China, where he is supposed to have raised China’s “unfair trade practices” with Chinese President, Xi Jinping, in a blunt discussion. Trump’s rhetoric has changed dramatically since his campaign, when he accused China of “raping” the US, and placing the blame on his predecessor for allowing it. “I do not blame China for taking advantage of the US on trade,” he said, “if their representatives are able to get away with it, they are just doing their jobs.”
US President Trump has landed in China for his first official visit, in what senior Chinese officials are calling a “state visit plus”. The world’s two largest economies are known to have billion dollar trade deals as well as North Korea on the programme. Trump has signalled that this trip will be different to previous presidential trips, with no reference to meetings with human rights representatives usually attended by the POTUS.
It was confirmed that $9 billion worth of new deals were signed yesterday between Chinese and US companies, with more expected today. JD.com, a Chinese ecommerce group, signed a deal to buy $1.2 billion of pork and beef over the next three years, sizing up to be one of the biggest deals signed during the visit. Minnesota-based wastewater treatment company Viroment also agreed to $800 million worth of deals to build plants with partners in China. The trade delegation accompanying Trump is made up mainly by manufacturing and industrial companies, including Boeing. Critics, however, are sceptical that the contracts will not come close to what is needed to fill the US’s $347 billion trade deficit.
Trump is also using the trip as an opportunity to link economic and strategic goals. He has implied softening his trade demands in return for help in managing North Korea’s nuclear programme. This carries on from the visit in South Korea, where he warned North Korea not to underestimate the USA. Speaking at the South Korean Parliament, he warned North Korea not to interpret American restraint as weakness, calling it a “fatal miscalculation” citing his current government as different from previous ones. The 35-minute speech has been described as unlike Trump, with a more positive and less provocative tone than feared. This has helped stabilise the US Dollar, which lost 0.3% in anticipation of Trump’s arrival in South Korea. There was very little movement the following day reflecting confidence in Trump following his speech.
Worries concerning the lack of transparency from the British government concerning Brexit negotiations emerging following an alleged meeting between Wilbur Ross, the US commerce secretary, and a number of large banks. Banks, including JPMorgan Chase, Goldman Sachs and HSBC, met with Ross on Friday highlighting concerns about the apparent lack of progress in Brexit negotiations. The banks are said to be worried by Britain’s lack of clarity surrounding Brexit talks and whether a transition deal will be reached.
Without clarity on Brexit, banks have claimed they would be forced to move jobs out of London and back to the US or to European capitals. In a recent tweet, Goldman Sachs’ Chief Executive warned that he expected to be “spending a lot more time” in Frankfurt post Brexit. Executives of the banks have also warned Ross that a “point of no return” is now approaching, when they must start moving jobs, capital and infrastructure in a worse-case-scenario plan, ahead of the March 2019 deadline.
The next three months will determine whether the mass exodus of jobs is necessary. The Bank of England confirmed last week that it was working on the assumption that ten thousand jobs would be lost if the UK left the EU without a deal. Nonetheless, Deputy Governor, Sam Woods, said that the seventy-five thousand job loss figure cited in a previous report by Oliver Wyman, was now “plausible” as a long-term figure.
Despite continued criticism of the current government, the possibility of a Labour government under Jeremy Corbyn is believed to be even more of a disaster. Corbyn has pushed for a “transition tax” – a tax on financial services – which Sadiq Khan, London Mayor and a member of Mr Corbyn’s own party, has called “madness”. The proposal was separate from the financial transaction tax discussed in 2013 by EU member states. George Osbourne, Chancellor at the time, promised to sue the Commission in the European Court of Justice if the tax affected the City of London.
Bank of England Governor, Mark Carney, announced yesterday that the Bank was raising interest rates for the first time in almost a decade. The 25 basis point rise from 0.25 to 0.5 percent was expected following Carney’s recent comments. Hinting at the rise in September, Carney suggested the bank was ready to “ease its foot off the accelerator,” with rises starting as early as November. The rise is aimed at pulling down rising inflation rates, keeping the rising costs to households down. Surprisingly, the pound fell following the announcement, down to the more cautious route the Bank seems to be taking on interest rate rises in the future.
The decision has analysts divided. Proponents of the hike are calling to the fall in unemployment, which is currently at its lowest levels since the 1970s. They are also quoting the need to curb inflation as reasons for the rise. Citing the 2012, 5 percent, rate as the example of what can happen when interest rates are left unmoved. Those questioning the timing of the rise, including us here at SGM-FX, have argued that wage growth is not yet strong enough to handle an interest rate hike. Real wage growth is currently stagnating despite nominal wage growth rising significantly. This leads onto other critics claiming the decision will put more pressure on those with debt. The TUC has criticised the decision by saying that “Today’s hike is a hammer blow for those in problem debt, those repayments will now rise. The Bank of England has made the wrong call.”
Click here to read our further analysis on the decision
The Federal Reserve Bank, the Fed, is set to hold interests rates at 1-1.25 percent in anticipation of an interest rate hike in December. Analysis conducted using Federal Reserve Bank of New York data confirmed a 98.5 percent probability that interest rate policy would remain the same, while simultaneously confirming a 96.7 percent chance of a rate hike in December. The decision looks to be priced into the market and so, unless there is a surprise hike by the Fed, should have very little effect on the price of the US Dollar. The decision looks to be down to solid economic growth and labour market performance. Presently, only inflation and wage growth stand in the way of Fed policy normalisation. Elsewhere, the unemployment rate has further declined, while household spending has also increased.
US President, Donald Trump, is set to confirm the new Fed chair tomorrow. Jerome ‘Jay’ Powell, extant member of the Fed board, and John Taylor, a Stanford University economist and brains behind the Taylor Rule, are both in the running. Current Fed Chair, Janet Yellen, is also in the top picks, however, she is seen as an unlikely pick. Rumours surfaced that Yellen does not want to accept another term as Fed chair, while Trump has also hinted towards a different direction.
The President has hinted towards appointing Powell as Chair for some time. Powell represents more of a continuation of Yellen’s system, rather than a break away from it. On the other hand, John Taylor, considered a ‘hawk’ by the market, is expected to have a more aggressive approach and will likely raise interest rates more significantly. Christian Keller, an Analyst for Barclays, said that the selection ‘probably won’t make that big of a difference.’
In a press release on Thursday, the European Central Bank, ECB, made the decision to reduce its quantitative easing program by cutting the number of bonds they buy every month and extending the schedule to September 2018. ECB President, Mario Draghi, added that they were willing to prolong the process even further if necessary. From January, purchases will fall to €30bn a month, half of what they are presently at. The ECB introduced the quantitative easing program – buying assets to stimulate growth – following the global financial crisis and the Eurozone sovereign debt crisis. They also introduced record low interest rates at 0 percent. The move was considered ‘dovish’ by the market – a bias towards stimulus given the situation – with the Euro dropping by just under 1.6 percent against the Pound Sterling in less than a week.
The crisis in Catalonia has rocked the boat in Europe this week with the Catalan President, Carles Puigdemont, fleeing to Belgium. Puigdemont’s lawyer confirmed last night that the president, along with five of his cabinet members, were in Belgium, but that no decision had been reached on whether he would seek political asylum there. Spain’s President, Mariano Rajoy, has called for regional elections in Catalonia since imposing direct rule over the region last Monday. Analysts have said that the political crisis, the worst seen by Spain in four decades, will not end soon. ‘Spain is headed for a period of disruption, and like the UK and Brexit, having its policy agenda dominated by one political issue’ said Raj Badiani, an economist at Markit in London. Catalonia represents 1.5 percent of Eurozone GDP. Straddling the gap between negligible and significant, Catalonia has been enough to generate a headwind, but not cause explicit devaluation, within the Euro.
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