Morning Brief – Wednesday 19th

Tariffs, Tariffs everywhere; but not a Dollar peak?!

$200Bn worth of goods at 10% levied against Chinese Exports to the US, including the proviso for this to raise to 25% next year, and now $60Bn worth of US exports to China will face 10% levies. Oh yeah, and the US sanctions on Iran come into effect in November with defensive rallies in Oil driving Brent crude up to over $80Pbl this month. The Dollar usually benefits considerably from defensive demand when perceived global risk increases because investors de-risk their portfolios and head to the ultimate sanctity of US treasuries: the safest asset within the (supposedly) safest economy. This is clearly not the case with the Dollar trading down considerably for the past two consecutive days. Inflation data has supported the Pound no end this morning, with unexpected inflationary pressures pushing the Consumer Price Index up to 2.7%. The Rand is benefitting from the Dollar’s weakness this morning and “Risk-On” move to markets. The Euro, a currency that has also sold off in the presence of a global trade war, also received a bid as markets change their mind about the trans-Pacific war.

Since Market Open:

• GBP: 7% inflation beats estimates of 2.4% and previous recording of 2.5%. Giving traders an insight into tighter future monetary policies, the Pound spikes through 1.32 against the Dollar.

• EUR: Recovering from an Italian yield spike that dragged the Euro down yesterday morning, the Euro trades up on the day as trade war risk is priced out and Brexit sentiment shines.

• USD: Tariffs underwhelm expectations with 10% seen as insignificant to domestic and global growth, the Dollar slumped upon the release.

• EM: The Rand and Lira enjoy a break as global risk stemming from a trade war facilitates an emerging market fight back.

Pound Sterling:

CPI wiped out:

Consumer Price Index data, the preferred measure of domestic inflation in the United Kingdom, was released at 09:30 this morning. The released attested to Year-on-Year inflation for august in the order of 2.7%, some 0.3% greater than consensus expectations and 0.2% stronger than July’s figure. The release saw Sterling rally some 0.4%, breaking through 1.32 against the Dollar. However, announcements delivered by Michel Barnier and messages emanating from Salzburg, undermined Brexit sentiment, causing the Pound to erode all of these gains and trade 0.06% weaker on the day versus market open.

The Euro:

Spill Over:

With little motivation of its own this week, with limited data releases or scheduled political economic events, the Euro trade has been caught between two factors: the trade war and Brexit. Since the beginning of 2018, $755.5Bn worth of levies and duties have been declared against Chinese exports into the US, with Chinese retaliation against the US affecting $229.9Bn worth of goods. Throughout each of these changes, the Euro has fared poorly upon fears of spill over into global growth. With an underwhelming retaliation from China yesterday evening following an equally mild sequence of Trumpian US aggression, the Euro had managed to gain ground. Following the concerns about a post-Brexit trade deal, however, the Euro has sold off, losing value to trade in negative territory on the day.

The Dollar:

Not Big Enough!

Something that I’m sure President Trump has heard many a time but rarely in relation to the amplitude of his foreign policy. 25% tariffs had been bandied back and forward between the US and China with hundreds of billions on the cards. This week, with 10% tariffs promised upon a total of $260Bn worth of respective exports, markets are pleasantly surprised by the restraint demonstrated by the two administrations on either side of the Pacific. The ultimate safe haven of the Dollar and US treasuries therefore lost some of their defensive demand, losing value across the board.

Emerging Markets:

T-24ish Hours:

The South African Reserve Bank will announce their monetary policy decision tomorrow. The decision and cause therein will likely frame the forward path of the Rand and domestic debt for the medium run and demonstrate the (privatised) Bank’s commitment to price level and FX stability. With emerging markets across the globe, from Turkey; to Argentina; to Russia, raising their interest rates aggressively to protect the domestic currency, pressure is mounting on South Africa to demonstrate similar commitment. However, with a statistical recession only a matter of weeks old, it is a testing time for Africa’s most significant economy.

Discussion and Analysis by Charles Porter

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