Caution Rules Currency Markets
The Pound made slight gains this week, as the currency markets’ stagnation reflects the growing global uncertainty. Today’s flurry of UK data releases features welcome good news: a better than anticipated increase in Industrial Production output and an increase in total trade balance. Unfortunately, as growing inflation cuts into consumer spending, families that were already ‘just about managing’ may soon find themselves in more of a jam.
Across the Atlantic the spotlight is on US President Donald Trump’s plans regarding taxes and trade policies as the dollar reacted positively towards his promise to stimulate the US economy with a new tax plan. Also, US jobless rate figures are at a historic 43 year low with the creation of 227,000 new jobs in January.
Pound Sterling – UK Markets
Today’s the busiest day of the week for UK data releases. December’s Industrial Production just released figures show the industry continued to benefit from momentum gained in November’s unexpected industrial sector surge. This was fueled by the return of one of the UK’s largest oil fields returning after a long shutdown. The industrial and manufacturing figures exceeded predictions, indicating the industrial sector was boosted by the increased volumes of North Sea oil and gas output.
The Pound was also strengthened by Prime Minister Theresa May’s Parliament victory, giving her the power to trigger Brexit without attaching any extra conditions. This signalled a smooth path for the bill on 20 February in the House of Lords and the likelihood that May’s March Brexit deadline will be met. A senior German banking regulator has warned that under the ‘equivalent’ Brexit scenario, London’s current role as a financial ‘gateway to Europe’ would end.
US Dollar – US Markets
President Donald Trump’s economic image was damaged by the leaked report that he rang his National Security advisor at 3am to ask him if a weaker dollar, which he’d said he wanted, would in fact be positive for the US economy. If economic growth stays on track and President Trump unveils a comprehensive economic plan, the Federal Reserve is likely to move ahead with a rate hike in the first half of the year which would further strengthen the dollar.
The US president’s promise that he would produce a “phenomenal” tax plan in the next few weeks lifted the dollar to a 1 ½ week high. Now the focus is on the 2-day summit between President Trump and Japanese Prime Minister Shinzo Abe beginning today. Financial markets are listening attentively for currency policies in particular, given Trump’s top trade advisor, Peter Navarro’s recent criticism accused Japan of devaluing the yen.
Euro – European Markets
The Euro is concluding a rough week, losing ground to both the pound and US dollar. Among the challenges facing the Eurozone is the urgent need to streamline financial services in a bid to strengthen Europe’s negotiating position in the upcoming Brexit negotiations. Another is the new divisions between the International Monetary Fund (IMF) and the Eurozone as a senior policymaker has criticised the IMF for its overly pessimistic evaluation of Greece’s future economic prospects. The spectre of Grexit has returned on fears that Greece might default on its July 17 debt bill.
Political jitters on several fronts have been the force behind the weakness in the single market currency this week as Marine Le Pen’s National Front party gains populist support. JP Morgan says the single market currency would shed 10% of its value, if she wins. The Dutch election takes place on 15 March (beware the ides of March?) with polls showing anti-EU Geert Wilders in the lead. His win is seen as the first steps toward Nexit, which is yet another factor keeping the pressure on the embattled euro.
Other Currencies – Highlights
The Canadian Dollar crashed upon Trump’s election, although the loonie has stubbornly regained some of its losses. This prompted financial markets to pose the question: is Canada the next country to be on the receiving end of President Trump’s currency criticism? He’s spoken out against key trading partners Germany, Japan and China, saying they’re devaluing their currencies to the detriment of American companies and consumers. Canada is one of the US’s biggest trading partners, and the Canadian dollar was said to be overvalued by 0.3% according to the Peterson Institute for International Economics, a nonpartisan research group in Washington, D.C. They calculated that the US dollar was overvalued by 7.9% in November.
When Canadian Prime Minister Justin Trudeau travels to Washington to meet with President Trump, trade will be at the top of the agenda. Prime Minister Trudeau will want to hear specifics from Trump regarding what he wants from Canada on the NAFTA trade agreements. Later today, Canada’s employment rate figures are in focus as January’s Net Change in Employment, Participation Rate and Unemployment Rate reports are scheduled for release. Pricewaterhouse Coopers has released a report forecasting Canada will lose its place as one of the top 20 economies by 2050 and it also sees the US’s position as the 2nd largest economy being usurped by India, with China remaining firmly at the top position, due to population size.