Morning Brief – Tuesday 2nd

Good Friday? Good Monday!

The Conservative Party conference is well under way in Birmingham, with headline speakers yesterday including International Trade secretary, Liam Fox, and long-standing government minister, Jeremy Hunt. Markets will have to wait until tomorrow for the premier Theresa May to speak at the conference. The Pound made impressive gains yesterday upon reports that Theresa May might be willing to accept a deal that allows a non-land border between the UK and Ireland. The Euro has sunk to a six-week low amidst considerable Dollar pressure and renewed Italian uncertainty. Emerging markets face even greater pressure this morning given the lift the US Dollar is presently enjoying. The renewed unfavorability of emerging markets has led the Turkish Lira to rise back above the key level of 6.0 against the Dollar following yesterday’s break of this support level. The Dollar’s rally follows a trade deal that has been highly praised by the US President generating an interesting conclusion that US-Mexican-Canadian trade is not of global systemic importance.

Since Market Open:

• GBP:   Sterling received a strong bid yesterday in the order of 0.2% as those privy to the inner Conservative Party suggested Theresa May would be willing to accept a Brexit deal including a sea border with Ireland.

• EUR:   Six weeks a loser: Italian domestic risk continues to mount; much to the Euro’s demise. Italy’s populists point their sights at Europe.

• USD:   You’ve got a deal! A boost for the Dollar suggests North Atlantic Free Trade is good for domestic growth but insignificant within the global system.

• EM:    The Lira returns and holds strongly above 6 to the US Dollar this morning as the Rand faces yet more selling pressure.

Pound Sterling:

Good Monday; Agreement?

European trading yesterday saw the Pound Sterling gain considerable value amidst supposed confirmation that Theresa May would be willing to accept a Brexit deal that included a border within the Irish Sea. According to the Good Friday Agreement (Belfast Agreement), encompassed within the heart of May’s Chequers Brexit plan and each Brexit guideline, there cannot be a hard border between the Republic and Norther Ireland. However, interpreting the agreement and sentiment behind it could be thought to permit a non-land border between the Republic and the Kingdom, precisely as the rumour suggested. This should be thought to facilitate concessions and a post-Brexit trading relationship between the UK and the EU. However, speaking at the conference today, DUP Leader (the party with whom the May has an agreement giving the Conservatives an effective majority in the Commons) Arlene Foster, entirely ruled out this proposal as economically unpragmatic and bad for the Republic and Northern Ireland. Sterling took a hit upon these words (in addition to the earlier affirmation of Jeremy Hunt) to trade down by 0.27% on the day.

The Euro:

Tragedy:

Italian Yields are soaring to highs rivalling the 2014 peaks last witnessed during the Sovereign Debt crisis. The spread over German Bunds has hit a year-to-date high demonstrating the additional stress within the Italian economy. The peak today was precipitated by the populist head of economic policy within Italy’s ruling (coalition member) Lega party, who suggested that “Italy would solve most of its problems if it had its own currency”. The comments are not entirely unfounded with a productivity crisis likely to be solved by the automatic stabiliser of a floating exchange rate. The comments unsurprisingly stuck a stark and secessionary tone, reigniting fears about the long run sustainability of the Euro. The Euro rumbled in response, opening the gate for yet more Dollar strength. To add even more chaos to the mix, markets have been led to believe that the European Union and the fiscal supervisory mechanism is unlikely to accept Italy’s budget as it stands and planned 2.4% deficit.

Discussion and Analysis by Charles Porter

Click Here to Subscribe to the SGM-FX Newsletter