BoE Wants Brexit Transition Period
The Bank of England, via its Deputy Governor Sam Woods, made it clear that a transitional period is required to make the Brexit process as smooth as possible, at least in the financial services sector. In his letter to the Treasury Select Committee, Woods warned that business conducted in the City could fragment to other financial centres across the European Union, driving costs higher. Woods also said that the Prudential Regulation Authority (PRA) will face an extra burden if it must regulate more financial firms, including 70 non-UK banks, incorporated in the European Economic Area (EEA), that are entitled to accept deposits in the UK.
Rising tension between the US and North Korea drove the European and Asian stock markets down. US president Donald Trump said that North Korea will face “fire and fury” if they hit the US military base in Guam. North Korea has allegedly produced a nuclear weapon that can be carried on its intercontinental ballistic missile (ICBM). The Japanese Yen was seen as a safe-haven for investors and traders, hitting a two-month high against the US Dollar.
Pound Sterling – UK Markets
Today, Sterling strengthened against the US Dollar with the exchange rate set at $1.30. The Pound jumped against the Euro with the exchange rate set at €1.10.
Sam Woods, Deputy Governor of the BoE and Chief Executive of the PRA, backed calls for a transitional exit deal in a letter to the Treasury Select Committee. Woods wrote that “some form of implementation period is desirable in order to give UK and EU firms more time to make the necessary changes in an orderly way.” The Deputy Governor said that the PRA is facing material risk to its objectives and added that the task of regulating the City, post-Brexit, will make it much more difficult for the BoE to police the financial sector.
An HSBC report said that British citizens, who are afraid of Brexit, are seeking shelter for their money in foreign currency accounts. The bank said that demand for its HSBC Currency Accounts (HCA), which allow customers to hold cash in foreign currencies, such as the Euro and the US Dollar, in the UK grew by 23% in June, immediately after the UK parliamentary election. On a yearly basis, the number of new HCAs, in the first seven months of 2017, is 5% higher than in the same period in 2016.
US Dollar – US Markets
The US Dollar gained minor ground against the Euro with the exchange rate set at €0.85. Market analysts are waiting for data regarding unemployment claims in the US, due to be published tomorrow, and, of course, inflation data which will be released on Friday.
The US currency drew some strength from a Labour Department report which showed that job openings surged to a record in June. The number of openings rose by 461,000, a figure that was last seen two years ago, showing that there was a strong demand for workers at the end of the second quarter of the year. However, analysts expect that the monthly pace of hiring employees will fall because the pool of qualified US workers is becoming smaller, causing problems for companies’ human resources departments.
Economists at ING suggest that the Fed will pick up its interest rates in December, a move that will be followed by two more rate hikes during 2018. The report by ING says that “the strong labour demand-weak labour supply” story points to more wage pressures in the future. ING’s analysts think that there is growing evidence to suggest that inflation is likely to soon return to target, while the “health” of the US economy seems to be improving. The report comes in contrast with the general market belief that the Fed won’t hike meaningfully its rates over the next couple of years.
Euro – European Markets
The Euro dropped against the US Dollar with the exchange rate set at $1.17. The European stock markets joined the world stock selloff caused by the new tension between the US and North Korea. Investors across Europe seemed to prefer a risk-off approach, following their counterparts in Asia.
The good news for the Eurozone came from Italy this time. The Italian economy is providing very positive data to investors and traders in the last weeks, despite the severe problems in the country’s banking sector. Italy’s industrial output in June came in at 5.3%, on a yearly basis, smashing expectations of 3.4%. On a monthly basis, the industrial output grew by 1.1%, again much better than the 0.2% expected.
The French president Emmanuel Macron invited Angela Merkel, Mariano Rajoy and Paolo Gentiloni to Paris for talks on migration, defence and economy. Macron, whose popularity is declining in France, will visit several EU countries as a part of a broader diplomatic offensive. A poll published at the beginning of August showed that only 36% of the French voters hold a favourable view of the president, seven points down from a same poll in July.
Other Currencies – Highlights
The Pound jumped against the Australian Dollar, trading at 1.64 AUD. The Aussie retreated when published data showed that home-loan approvals rose by 0.5% in June, which was the second straight month of increases. The reading disappointed expectations since economists were anticipating a 1.5% growth in the first month of summer. On a year-to-year basis the total number of housing finance approvals is down by 4%. Westpac’s Consumer Sentiment Index declined in August, marking the ninth consecutive month that pessimist consumers outnumbered the optimists. According to Westpac, such a succession of weak readings hasn’t been seen since 2008.
Sterling strengthened against the New Zealand Dollar, trading at 1.77 NZD. Later in the evening, the Reserve Bank of New Zealand (RBNZ) will publish its Monetary Policy Statement (MPS) and announce its decision on its benchmark interest rate. Economists predict that the RBNZ is going to keep the interest rate on hold at 1.75%. ANZ analysts expect that the RBNZ will reinforce its aggressively neutral bias, which will result in the weakening of the Kiwi.