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Confusion Reigns

Stick or twist? U.K. outlook unclear by every measure

There is no right answer but, then again, there is no wrong answer either. Politics, monetary policy, economics; each has a unique set of drivers that are subject to interpretation like never before.

Politics

Precedent isn’t any help. In politics the two major Governments of the past thirty-five years, Thatcher’s and Blair’s, no matter what you thought of them brought a kind of stability as we knew what to expect until we didn’t and they got removed. The lurch from right to left or vice versa brings turmoil and that is what we are seeing now.

Austerity as a doctrine has run its course, certainly as far as the population is concerned. But is tax tax tax, spend spend spend going to fare any better than cut cut cut? There is a fair chance we are going to find out.

Monetary Policy

It was hailed as a great idea when, of all things, a labour Government released the reins on economic decision making and created the Monetary Policy Committee. Government finally accepting that using a broad-based group of industry professionals to run the economy was better than a bunch of career politicians. If only that could be applied to public transport, health and education, Utopia would be on the horizon.

The MPC is now fractured as never before. This is not particularly a dreadful thing as any decision is not politically motivated. However, the MPC’s mandate includes a “crystal ball clause” where how the economy will look in two years’ time must be considered. Imagine that! Confused? No question.

Will there be a hike on August 3? Quite possibly, or probably or certainly. Who knows. The new member Silvana Tenreyro, is going to suddenly become much sought after. Replacing arch-hawk, Kristin Forbes, it is yet to be determined Tenreyro’s avian leaning.

McCafferty and Saunders will vote hike, Haldane will vote Hike, Carney? Maybe hike, maybe not. Broadbent, Cunliffe and Vlieghe; hold.

Welcome to the MPC Ms. Tenreyro.

Economics

Real wages are falling. Is there anything more devastating to the economy no matter the reason? People are earning less for the same amount of work. Higher inflation, cost cutting businesses? It doesn’t really matter. Concern over keeping your job is one thing and, unless you work for Tesco or a bank, that has been replaced by what you can buy each week.

Stagflation

There, now I have said it. The genie is out of the bottle, Pandora’s box is open. The elephant is in the room.

Is that where the U.K. is heading? Most commentators see the U.K. economy slowing. Another 0.2% rise in GDP in the three months to June is likely to be announced by the NIESR on Friday. This is hardly stellar but a rate hike in such circumstances? No wonder Carney is concerned.

Employment is, according to the Government, at record levels. Thank the gig economy, zero hours contracts and kids on Government sponsored training schemes for that. On the dole? No, I’m on a training scheme that the Government pays me to be on? Semantics! You are unemployed!

Kim; no longer a cartoon joke

North Korea gets ever closer to being able to reach the U.S. mainland with a nuclear missile. So, what! They would never launch and if they did, America has sufficient technology to intercept it before wiping North Korea from the face of the earth.

Not necessarily so. There are no guarantees in diplomacy. Add in China, Russia, Japan and South Korea and you have a heady cocktail of self-interest.

Market reaction? But the JPY and CHF. Risk aversion is coming, let’s hope for California a nuclear tipped missile isn’t!

 

 

 

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Pound weaker as data disappoints

Manufacturing output falls

While the consumer has been the mainstay of the U.K. economy over the past year or so, manufacturing has been steady not causing many major alarms yet not growing particularly strongly either. This had been a picture repeated in both the Eurozone and U.S. but yesterday that picture changed somewhat.

While it is never wise to attach too much attention to a single month’s data (ask Mark Carney) the fall in yesterday’s release of ISM manufacturing figures will concern the MPC.

Manufacturing fell from 56.3 in May to 54.3 in June. The May number was also revised slightly lower. A read above 50 still means that manufacturing is expanding but the rate has slowed considerably.

The same data in the Eurozone showed that manufacturing remains fairly constant reaching 57.4 following 57.3 in May.

There was a major turnaround in the U.S., however, as output rose to 57.8 from 55.2, the largest single month increase in three years.

The dollar index reacted positively rising above 96.00 but facing strong resistance. The pound and Euro corrected but still appear well supported at slightly lower levels.

 MPC Dove counters rate hike argument

Renowned MPC dove, Gertjan Vlieghe, a well-known dovish voice on the BoE MPC spoke out yesterday over the calls for a tightening of monetary policy and higher interest rates in the U.K.

Vlieghe has been a lone dovish voice, calling for a rate cut in the wake of the Brexit referendum a month before his colleagues caught up.

Yesterday, in an interview, he said that the risk of a hike too soon outweighs the risk of one proven to be a little late. He said, “This is an environment where a premature hike would be a bigger mistake than one that turns out to be slightly late”. Given the recent comments from his colleagues that that ship, if it hasn’t already, is very close to setting sail, his may be a voice in the wilderness.

The pound, already suffering following weak data took this as a sign that a rate hike isn’t as cut and dried as had been assumed after recent comments from other MPC members. A balanced discussion can now be expected when the MPC next meets on August 3rd.

RBA on hold for longer than expected

Citing fears over the housing market and any change to policy which could strengthen the AUD, the Reserve Bank of Australia not only held rates unchanged overnight but produced a more dovish than expected statement.

While the market didn’t expect a rate hike at this meeting to defer any hike until sometime in the future. It wasn’t all an anti-climax; the statement was fairly upbeat on business condition which have been improving gradually and a marked improvement in capacity utilization.

The AUD fell following the announcement and given the probable divergence in policy, a further fall is possible.

Pay Cap row intensifies

Just as Theresa May was getting her bikini out and booking a leg wax ahead of her summer holidays another row has flared up that threatens to derail her.

The opportunistic but tactically brilliant attempt from the opposition to force an abandonment of the fiercely unpopular 1% cap on public sector pay increases has created ripples throughout the Government. Two senior ministers and a host of less significant but equally vociferous members have voiced an opinion that the time has come to loosen the purse strings.

Mrs May is, so far, against any change in policy and this could be the start of the campaign to oust her.

 

 

 

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The Crisis is Over!

Monetary tightening suddenly en-vogue.

As Central bankers, Mark Carney and Mario Draghi fit the bill perfectly. Calm under pressure, very much “their own men” and prepared to take tough decisions, they are worthy leaders.

It is perhaps poignant if not particularly significant that Carney chose a speech at an ECB conference to accept that the time for a rate hike in the U.K. has finally arrived. His comment that a rate rise is probably necessary and the MPC would discuss it in the coming months was the perfect response to the growing clamour since the 5-3 vote at the last MPC meeting.

Sterling rallied to reach close to 1.3000 versus the dollar and managed to break back through the 0.8800 level against the euro, despite the common currency’s recent strength.

It seems that no matter what drivers are the current favourites of the market, traders cannot avoid interest rate differentials as the No.1 factor.

Given the length of time that we have seen ultra-easy monetary policy and never seen stimulus packages it is good to be able to say, “The Crisis is Over”! If Carney and Draghi believe it, it must be true!

Sterling rally to aid long term inflation fears.

A lot has been written about the fall in sterling since the Brexit referendum vote more than a year ago and how producer prices, in particular, have been affected, rising 20%+ YoY in the spring.

As we reach the end of H1 ‘17, sterling stands a little over 8% higher than it did in January against a dollar which has been aided by three rate hikes during the same period.

Nothing much is yet being said but the positive effect on inflation when coupled with the coming tightening of monetary policy should see further advances. The positive effect of lower inflation on real wages will also drive a brighter H2.

Brexit is clearly the “elephant in the room” and there will be bumps in the road as the major points are discussed. There is a growing realization that despite its gaining the initiative in Brexit talks following the political upheaval in the U.K., that the EU needs to be a little more conciliatory in its attitude to several major points.

The “summer lull” will soon be upon us and provided the Government remains in place a consolidation of Sterling’s recent gains is likely.

Next week’s data releases likely to set tone

It seems a long time since the market was driven by data as opposed to political or monetary policy factors. With the new month comes EU unemployment, EU and U.S. activity indexes, the U.K. NIESR GDP estimate and finally, the “big one” U.S. employment. Throw in U.K. inflation hearings, a rate decision in Australia and FOMC minutes and it could be a busy week!

The U.S. employment report still “reigns supreme” as the most eagerly anticipated monthly data release. Its interpretation when broken down is a microcosm of each subsequent report. It has become seemingly less reliable over the past year or so. As the economic picture becomes clearer and stimulus is removed we will see a fairly consistent vision of employment which will lead the market to look elsewhere, probably at interest rate differentials for inspiration.

As three major central banks turn to a hawkish or at least “balanced” bias, interest rate differentials and the relative pace of rate rises will be the significant driver.

 

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Euro at ten-month high

Draghi becomes the market’s darling.
It is a while since a Central Banker held the market in thrall the way Mario Draghi does. Sr. Draghi won’t win any personality contests and it will be a while before he rivals Messrs Greenspan and Bernanke but he is the right man in the right place for the Eurozone.

Lucky? Possibly. Steely in his determination? Probably. Understanding of his responsibilities to the entire Eurozone? Definitely. His fixed non-extendable term runs out on November 1, 2019. Replacing him will be a challenge to put it mildly.

Yesterday the ECB President turned from dove to hawk almost effortlessly. On Monday, he was extolling the virtues of low interest rates as a stimulus to borrowers and the creator of greater equality. Yesterday he voiced concerns that deflationary fears have been replaced by inflationary pressures.

The market drove the common currency to fresh ten-month highs as a weaker dollar fell to 1.1355. The basis for further gains is in place despite the FOMC’s continued rate hike policy and now that Sr. Draghi has at least acknowledged the possible need for a tightening of monetary policy resistance at 1.1420 and 1.1500 is under threat.
May in the firing line.
Theresa May will wake this morning (she probably already has!) to the awkward prospect of today’s Prime Minister’s Questions in the House of Commons. This will be the first of the new Parliament and she is sure to get a rough ride. The opposition Labour Party have already tabled an awkward amendment to the Bill on the Queen’s Speech so she is aware of the probable scenario.

Sterling rose versus the dollar but fell against the Euro as contrasting fortunes buffeted the major currencies. The pound was last trading at 1.2815 having reached 1.2862. The Euro finally broke 0.8840 and now has 0.9000 in its sights. The common currency is close to overbought territory so a correction may be seen before the “assault on the summit” takes place.

Public spending cuts are now the number one topic facing the Government domestically. This is the battle ground chosen by the opposition since it is aware of the Government’s “soft underbelly”.

Popular Socialism is fast becoming “de-rigeur” replacing what is seen as uncaring, business friendly right leaning policies.
Where are you Donald?
President Trump has been conspicuous in his absence over the past week or so. His healthcare reform legislation has again been delayed by Congress as the majority Leader tries to drum up more Republican support. This doesn’t bode well for Trumps ability to pass his stimulus and tax reform agenda.

Fed Chair, Janet Yellen spoke in London yesterday about measures that are now in place that cannot allow another financial crisis like that of 2008 to affect the market. Two words Janet; Black Swan.

Mrs Yellen Chairs a united FOMC. We have seen speeches this week from the Presidents of the New York and San Francisco Fed’s agreeing over the rate hikes so far and the (possible) one(s) to come.

Minneapolis Fed President Neel Kashkari, the President of the Minneapolis Fed, broke ranks a little yesterday, asking why the Fed needed to hike any more this year. He feels that since inflation is benign and wage growth muted the case for further rate hikes doesn’t exist. I am sure that even from far-flung Minneapolis, Kashkari can see the progress of the DJI.

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The Cost of Power

May signs one-billion-pound cheque.

It seems that the cost of hanging on to power in the U.K. has risen substantially. Theresa May has agreed a package of one billion pounds in aid to Northern Ireland as part of the deal to secure sufficient votes to keep her minority Government in power. The odds still favour an Autumn election and possibly a further swing to the left.

 

The pound has barely reacted to this news. Possibly it is a double-edged sword. On the one hand, we have a Government still leaning quite heavily towards a hard Brexit propped up by a small yet radical party totally opposed to the continuing adherence to the “Good Friday Agreement”. On the other there is a possibly Marxist socialist promoting a high taxation economy where privately-owned assets are “re-nationalized” and public services drain investment. Jeremy Corbyn’s shameless electioneering at the Glastonbury Festival has brought amusement to Government officials but deep down they are wishing they had thought of it.

 

Whatever happens, the U.K. is facing a tough winter ahead. Inflation is about to top 3% with the MPC’s hands being tied to a certain extent. Calls for a tightening of monetary policy are met with concerns over choking off growth.

 

Draghi confirms Dovish stance

There are any number of EU officials who believe it is their right to “put in their two pennies worth” on Brexit and other EU-wide issues, it is remarkable therefore that Mario Draghi’s is the only voice heard discussing the Eurozone economy and the common currency.

 

Nonetheless Draghi’s is a lone voice and that to his credit. His job, once considered a poisoned chalice is coveted by several Eurozone Central Bankers. The popular demand is “anyone but a German!”

 

Yesterday the ECB President was in Lisbon addressing a meeting with students. He was pressed about the need for tighter monetary policy to get ahead of the curve as the economy expands.

 

His comments were typically dovish voicing concern about low inflation and remarking that low interest rates promote growth, and help borrowers. He went on to say that he is concerned that tightening monetary policy would drive parts of the Eurozone back into recession and promote inequality.

 

The single currency is still struggling to break above 1.1250 and 0.8840 as interest rate differentials, real and possible support the dollar and pound.

 

Draghi isn’t even promoting a wait and see policy similar to the bank of England. His view is that since he is responsible for monetary policy across the entire region he must be careful to balance inflation, growth and employment.

 

FOMC members singing from the same sheet

Fed Chair Janet Yellen will address a conference in London later today at which she will confirm her view that despite recent weak data the Fed has been right to hike three times this year. Good luck with that!

 

The durable goods orders report was weaker than expected registering a fall in May. This is a notoriously fickle piece of data due to the individual “ticket size” where a delay in delivery of one aeroplane can completely skew the data. The size of future orders is a little more stable however and weakness there could be an early warning of a manufacturing slowdown.

 

Yellen’s colleagues William Dudley and John Williams both backed the recent hikes. Williams, the San Francisco Fed President said that lower inflation is due to one-off factors and should affect the future path of interest rates, while Dudley the New York Fed President and Yellen’s possible successor, commented that in real terms there has been a loosening of financial conditions over the past year.

 

The dollar is still struggling against the Euro which continues to test the 1.1200 level although there was buoying of dollars against the JPY as risk appetite improves.

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May facing Crucial Week

Queen’s speech vote likely to be watershed.

The U.K. Prime Minister Theresa May is lacking grass roots support from her fellow Conservative MP’s but they are allowing her “enough rope to hang herself” by providing at least lukewarm support for her massively watered-down manifesto.

 

Any Conservative MP who campaigned on a strong pro-Brexit ticket with confidence that they would receive a healthy mandate will be looking towards his constituency with some concern.

 

The vote, likely on Wednesday or Thursday, could be the final act in Mrs May’s political career. The “Rockstar” Leader of the Opposition, fresh from his Glastonbury “gig”, Jeremy Corbyn will, certainly hope it is.

 

The longer any perceived deal to keep the conservatives in place takes to be ratified, the less likely it is to take place at all. This would leave the Government in a very precarious position but could suit them better as they will not need to concede too much to a party that would, in any event, be likely to provide support.

 

An Autumn election still seems the most probable outcome and if that happens Mrs May’s ultimately disastrous term as leader will already have been consigned to the history books.

Sterling calm as liquidity remains high.

Remember flash crashes? Hard to predict; impossible to survive. The ultimate white-knuckle ride. A thing of the past? Quite possible but like black swans, they are always lurking, ready to destroy the performance of even the most confident trader.

 

Sterling has tended to be the most frequent victim of flash crashes. However, the almost daily, improvements in technology together with a dilution of banks manual involvement in the market has led to plentiful liquidity and a narrowing, if that were possible, in spreads.

 

This has been a tumultuous period for the U.K. Politics and monetary policy two major drivers of currencies have been at their most unpredictable yet the currency has performed serenely.

 

A widening of the gulf between those wanting to hike interest rates and those favouring the status quo would normally see a fall in the currency. A political maelstrom such has engulfed the Government would have also been a major negative.

 

No such luck for those traders looking for a bit of volatility before their summer holidays (perhaps even to pay for said holidays in some cases).

 

Against the Euro there has been a little weakness but any move above 0.8800 has been met with support. It is a similar story against the dollar. Both currencies have seen activity which has the potential to provide volatility but the unwinding of the “Trump Trade” has offset the three rate hikes.

Summer of Love for the Euro.

Parity? Quite possibly. If you had asked traders if they expected to see parity this year they would have most likely have answered in the affirmative. We are of course talking about the Eur/Usd rate. It was trading at 1.0460 with two potentially extremely negative elections coming up. Mark Rutte put Geert Wilders firmly in his place and Emmanuel obliged doing the same to Marine Le Pen. This created the groundwork for the common currency to thrive.

 

But what’s this I hear? More calls for parity? At the same time as the single currency has become the “darling of the market”, Sterling has fallen spectacularly from grace.

 

So, parity for the pound against the Euro? Why not. If Brexit goes badly and no deal can be struck, the effect, even initially, on British firms selling to the EU could be catastrophic. A lot of bankruptcies could ensue, economic activity could crumple while inflation continues rising leaving the pound to collapse.

 

Donald Tusk, with stars in his eyes, says he dreams of the U.K. “returning to the fold”. Of course he does, the very minimum expectation for the U.K. withdrawing its triggering of Article 50 would be to join the Euro.

 

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Another fine mess!

MPC Split widens.

Outgoing MPC policy hawk Kristen Forbes couldn’t resist a final salvo over interest rate policy as her term as an MPC member ends. In a research paper, she voiced concerns that the U.K. economy was suffering lasting damage from the fall in Sterling. Governor Mark Carney probably feels that this “parting shot” is a case of fitting the evidence to both her recent voting actions and a justification of her outlook.

 

The MPC was formed to have an informed yet diverse outlook so that is what the Government is getting!

 

Forbes’ replacement is Professor Silvana Tenreyro, a Harvard Ph.D. She has worked with both the Federal Reserve in Boston and Banque de France.

 

During a period as a member of the MPC of the Central Bank of Mauritius, she was considered a dove. It is doubtful that that experience can be considered when judging her voting intentions in her new position.

 

Andrew Haldane, the Chief Economist at the Bank of England and a voting member of the MPC has turned a little more hawkish in his view of the U.K. economy. He believes that a rate hike can be tolerated and signalled his intention to vote for a hike once the “political dust cloud” has settled.

Politics creates short term pain

It is never a clever idea to allow the market to interpret political issues as a driver of currencies. The result tends to be inconclusive at best, given opinion bears a major influence.

 

Good old economic data using past performance as an indicator for future outcomes suits dealers far better. Take the U.S. employment report as a prime example. This is a notoriously fickle report often being adjusted the following month by up to 25% in either direction. Yet the Friday afternoon on which it is released is often the single most volatile trading period of the month.

 

Plenty of traders can be heard to say, “I never trade the employment data” or “why open yourself up to being whipsawed”. Nevertheless, someone is trading because volumes are also often the highest in the month.

 

Since the first Friday in July is the 6th, despite the U.S. Holiday on the 4th it should be hoped that the extra time will allow for more accurate data. We will see.

 

Before that event, we have two more weeks of minor data releases interspersed with huge “dollops” of political wrangling

 

Currencies remain in well-trod ranges.

The pound tested the bottom of its recent range on Wednesday as BoE Governor gave his opinion on why interest rates need to remain on hold in the U.K. Yesterday, in response to more “hawkish” comments, it managed to rally against both the dollar and euro. It reached 1.2740 and 0.8770 moving away from resistance levels that have held well.

 

The jury is still out on the U.K. Government’s new “soft-Brexit” approach but Theresa May’s olive branch regarding EU nationals resident in the U.K. has been well received as a good starting point.

 

The dollar index which has been in the doldrums has recommenced its rise reaching 97.87 before a shallow correction.

 

Risk appetite appears neutral as denoted by the performance of the JPY and CHF both of which appear to be waiting fresh impetus before resuming their trend.

 

Oil rebounded a little but remains a victim of excess supply despite OPEC’s best efforts. Brent rose to $46.75 a barrel before falling back below $45.00

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Danger: Thin Ice

U.K. Government struggling to survive

It will be something of a political Houdini act if the minority U.K. Government manages to survive until the Parliamentary summer recess which begins on July 21st.

 

Yesterday’s Queen’s Speech which marked the opening of the new session was delivered in a sombre fashion and was thin in policy objectives as was pointed out by the Leader of the Opposition in the subsequent debate. He commented that there was not sufficient proposed legislation for a single year let alone two. Since Brexit will be in full swing next year, there will be no fresh legislation announced to allow Parliament to prepare fully for the departure from the EU.

 

So far, the foreign exchange market has taken the political turmoil in its stride. This is surprising given that BoE Governor, Mark Carney, has placed himself firmly in the “no-hike” camp, stagflation is a looming concern and the less said about politics the better.

 

Any deal with the Democratic Unionist Party is apparently “some weeks away” so there is still an opportunity for mischief making for the opposition before the recess.

 

Sterling broke the 1.2600 level yesterday for the first time in two months but remains supported with traders “cautiously pessimistic”. It bounced a little but remains in a shallow downtrend.

Even doubters marvel at Draghi’s economic miracle.

Who was it who said that nineteen into one doesn’t go, that one size doesn’t fit all and that the single currency “experiment” was doomed to failure?

 

Oh yes, that was me, so it’s humble pie for breakfast lunch and dinner as a seismic shift in my attitude has led me to accept that Mario Draghi can walk on water.

 

To have steered the Eurozone economy through the roughest part of the financial crisis whilst maintaining stability across such a diverse group of economies each managing their own fiscal affairs is miraculous. I still cannot accept that the motives behind the single currency are purely economic but you cannot “study what’s on the mantelpiece when you are stoking the fire”.

 

Persuading traditional high inflation high interest rate countries like Italy and Spain to accept monetary responsibility or profligate economies like Greece and Cyprus to live within tight fiscal boundaries has been an achievement worthy of immense credit.

 

Enough grovelling, where do we go from here. It may be that the severity of the situation was what sharpened the minds of the nineteen and as things improve the old attitudes will return. I am reminded of the LTCM bailout when, once the package had been put in place, one of the partners asked, “does this mean we can pay our bonus now?”

OPEC won’t be mourned.

The way oil has fallen in price over the past couple of months has been unmistakable evidence of the possibly life-threatening malaise that has infected OPEC.

 

The scourge of the U.S. in the 1970’s, OPEC came close to bringing “The Great Satan” (as the Iranians like to call America) to its knees. The 1973 oil crisis began in October of that year when the members of the OPEC proclaimed an oil embargo. The embargo occurred in response to United States’ support for Israel during the Yom Kippur War. There were five original members of OPEC; Saudi Arabia, Iran, Iraq, Kuwait and Venezuela. Since Venezuela was the only non-Arab member, it went along with the others demands.

 

The advent of more sophisticated exploration technology, production from shale and more recently, President Trumps more gung-ho attitude to exploration in the Gulf of Mexico have been nails in the coffin of OPEC.

 

Unable to control supply and demand that has been variable, subject to the economic development taking place in China, OPEC’s influence is on the wane.

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The Start of the Long March?

Carney’s comments drive pound lower.

It has been surprising and maybe a testament to the amount of liquidity there is in the market that the pound has remained reasonably resilient to the negative factors that have dominated the market for the past month or so.

 

Yesterday, Mark Carney, the Bank of England Governor made a speech to the City in which he may have just started the fall in Sterling that, according to some, is long overdue.

 

Carney said that “now is not the time to hike rates”. Looking at the economy, on the one hand that is almost stating the obvious. However, on the other hand, given inflation which shows no sign of abating, rising at 0.2% per month, it is also dangerous and opens the possibility of a charge of “fiddling while Rome burns”.

 

The three dissenting voices on the MPC, Kristin Forbes, Ian McCafferty and Michael Saunders, have the luxury of reacting to data, Mr Carney must face to music and justify the ways in which the Bank of England is creating monetary conditions that comply with the Government’s economic policy.

 

Dollar benefitting from Interest Rate Differentials

It is perhaps unsurprising that President Trump, shooting from the lip, accuses other countries, most incredibly Germany, of being currency manipulators given his failure to grasp economic reality.

 

The “hocus pocus” spouted by various sectors of the Administration either pro or anti the performance of the FOMC ignores one simple fact; interest rate differentials are the single most potent factor in driving foreign exchange rates.

 

The economic data doesn’t really bear out the three hikes that have been seen already in 2017 but the stock market certainly does. Since a corrective fall of 258 points on May 17th the Dow has made that back and gone on to see just six (very minor) “down days” since.

 

If only Janet Yellen could come up with an expression like “irrational exuberance” to quantify her concerns or become more respected like a Greenspan or Bernanke the brakes could be applied. Unfortunately, the lack of respect shown by Trump despite his flip-flopping over rate hikes between campaign and Government has come close to destroying her credibility.

 

May facing a bleak future.

Finally, today sees the delivery of the Queen’s Speech to Parliament. The Queen herself may be the least interested person in attendance given that it is her “favourite week of the year”. Royal Ascot, the annual horse racing event held close to her home at Windsor Castle and given royal patronage since 1711 when it was founded by Queen Anne started yesterday.

 

On a more serious note however, Theresa May, the Prime Minister is going to face a barrage of insults, abuse and calls to resign when she rises to commend the speech to Parliament.

 

Her performance is her final chance. Having lost a majority which was hard fought for by her predecessor following five years of coalition infighting and backstabbing, Mrs May is now being seen as “unfit to lead”. This is an incredible turnaround from even the week before the election. The vote was perhaps the biggest shock in politics in recent years overshadowing, Cameron’s victory, Brexit and Trump.

 

Parliament leaves for summer recess on 21st July so the Government has a month to survive and it is not by any means out of the question that before the break an election could have been called for the Autumn

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Fed at odds over Rates

Stick or Twist?

The three-hike policy that the FOMC has embarked upon seems to be held together more by hope than expectation. In her advance guidance to the markets, Fed Chair Janet Yellen has cited the economy as the reason for rate hikes so far this year without having a basis in fact for the actions.

 

Yesterday two members of the FOMC made speeches giving different views of the path for rates over the second half of the year.

 

Fred Dudley, the President of the New York Fed said he believes that wages growth and inflation will pick up and justify the hikes that have taken place already. A kind of reverse logic. If that is the case, then the hikes haven’t been sufficient. There is getting ahead of the curve and wishful thinking.

 

By contrast, the President of the Chicago Fed, Charles Evans said he believes that the Fed should wait until the end of the year to have a clearer picture of the economy.

 

The truth behind the rate hikes is concern over the stock market. When you look at the Dow Jones industrials, the index broke 18k on 8th July last year, 19k on 22nd November, 20k on 25th January and 21k on 1st March. It has continued an upward path since then with no sign of slowing despite rate hikes.

 

There is an expression that sums this up; irrational exuberance. Last used 21 years ago!

 

May Leadership facing final act?

Changes of leadership in political parties are seldom the result of a creeping malaise but the speed with which Theresa May has fallen from grace is startling! A little more than a month ago her approval rating meant that she was as popular a Prime Minister as has been seen since Blair’s early days. Seen as a strong advocate for Brexit despite her Remainer credentials she was the person to get the best deal for the U.K.

 

A lacklustre (at best) election campaign and an aloof attitude have led to her being cast as a lame duck unable and unwanted to lead the Government into another election campaign. In politics, as in life, be careful what you wish for.

 

May has become the symbol of all this is bad in U.K. society.  Austerity, cuts in social care, emergency services and welfare have all become millstones around her neck.

Tomorrow’s Queen’s speech could be her final throw of the dice. Torn between a typical right leaning Tory programme to appeal to her traditional supporters and a more caring centrist agenda to show that she can listen to the public she is be damned either way.

 

Currencies enter summer lull a month early

Traditionally the foreign Exchange market takes its holidays for the entire month of August. Volatility tends fall interspersed by bouts of action as liquidity also dries up. Given a quite hectic first half of 2017, it seems that summer has come early. It is an appropriate time to draw breath, take stock and preview what will be the themes of H2

 

Brexit is sure to be major event. It is hard to imagine the outcome of every milestone but before the fight has even started, recent events in the U.K. have put the EU ahead on points.

 

Politics have dominated H1 and the fate of the U.K.’s minority Government will be a key driver going forward. It seems that positivity over the possibility of a Government with a huge majority has been replaced by positivity over a more accountable and caring administration.

 

Germany goes to the polls to formally crown Angela Merkel as the Doyen of the EU. Were she to be defeated, it would dwarf the election shock we have seen over the past few years.

 

Economically, the scene is set for the Eurozone to power ahead. Everything’s coming together for Sr. Draghi and his light touch is proving a success.

 

Sterling seems to have to most headwinds with economic and political concerns set to add volatility dependent upon liquidity.

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