Dollar Drops and Trump and Putin Bromance Fails
The pound has surged to a 2-week high against the dollar after President Trump commented that he’d rather keep the dollar weaker. Sterling was strong for most of the week, in spite of releases showing real wages aren’t keeping pace with inflation and the economy is slowing.
The US dollar dropped to a 5-month low after President Trump stated that he prefers weaker interest rates that keep the dollar down. Russian president Vladimir Putin said that the trust between Russia and the US has ‘deteriorated’. Chinese President Xi Jinping is using his influence to discourage Trump from escalating tension with North Korea ahead of another nuclear test.
Pound Sterling – UK Markets
The pound has surged to a 2-week high after President Trump got his wish of having a weaker dollar almost immediately after stating it. It’s not expected that the dollar will hold this temporary position, and also the pound will most likely lose strength if the geopolitical tensions begin to fade. The weaker euro ahead of French elections is another bonus for the pound. Over the holiday weekend, a clash between the US and North Korea would keep the pound stronger going into next week. There’s very little data, except political news, now influencing most of the major currencies.
There’s increasing evidence of a housing market slowdown. The Royal Institution of Chartered Surveyors (RICS) has said that the number of homes for sale by each estate agent is now down to a record low. Available properties sitting on agents’ books was at a record low of 43% for March. This sharp decline in activity shows the effect of the new tax laws that began on 6 April which caused buy-to-let landlords to flee the marketplace. In their absence, 11% more first time buyers took out mortgages, according to the Council of Mortgage Lenders. In March, house prices fell for the first time in 2 years with the average UK house now costing £207,308, according to Nationwide.
US Dollar – US Markets
The US dollar has performed poorly all week on fears of a conflict between the US and North Korea when the later has another nuclear test, which appears scheduled for this Saturday. Chinese president Xi Jinping has used influence with President Trump to persuade him to avoid a military encounter with Trump’s ‘menace of North Korea’. Also, US secretary of State Rex Tillerson met with President Putin which didn’t seem to improve US Russian relations which are at a low ‘point.’
The International Monetary Fund’s (IMF) managing director Christine Lagarde warned against singling out any country for currency manipulation, saying that the ‘whole system works together.’ Her comments were intended to influence Trump’s 15 April Congressional report on the exchange rate policies of the US’s top trading partners. Trump has made a U-turn on his promise to call China a currency manipulator, which he promised to do on ‘Day 1.’
Previously, China was manipulating its currency, but it’s not doing so now. China had kept the value of the renminbi (or yuan) low from 2000 to 2014, benefitting Chinese exports. China also bought over $4 trillion in its foreign reserves, keeping the dollar stronger. Until 2005, the People’s Bank of China pegged the renminbi to the dollar, reducing it when the dollar weakened against other major currencies. It’s estimated that 2.4 American jobs were lost as a result of increased Chinese imports between 1999 and 2011. Trump’s promise to return these jobs is largely what got him elected. The US president may simply reverse his position, as he recently did on another topic: NATO, which he no longer considers ‘obsolete’. His comments to the Wall Street Journal, yesterday, also included a statement that he’d like to see interest rates stay low because the dollar was getting too strong. The dollar sunk to a 5-month low after his comments.
Euro – European Markets
The euro is weaker on fears of an upset as the 23 April first round of the French elections draws nearer. It now seems possible that far-right Marine Le Pen could end up in the second round against the increasingly popular far-left Jean-Luc Melenchon. The euro has been remarkably resilient, although it’s lost 2.3% against the US dollar over the course of the last ten days. If Marine Le Pen were to win the elections, the euro would be likely to plummet like the pound did after the Brexit vote. One notable difference with France’s elections, however, is that, since there are 2 rounds, polls are likely to be more reliable than they were with either Brexit or the US elections. From now until 7 May, the investors will be paying a lot of attention to the polls.
There’s scant data being released of any major importance, although there is some good news coming from Italy. Inflation is rising by slightly more than expected, according to the Consumer Price Index which is up for the month of March and also for a year on year figure. Also in Italy, it turns out that fountains are a considerable income source for Italian charities. Last year, Rome’s Trevi fountain collected £1.2 million (€1.4 million euros) as tourists engaged in the legend that throwing a coin in the water guarantees a return to Rome in future.
Other Currencies – Highlights
The pound to Indian rupee exchange rate has rebounded as the rupee was unable to hold onto some of its recent strength. The landslide election of the government’s BJP government in the state of Uttar Pradesh made India more inviting for investors, and this drove up the rupee. The government’s demonetisation, the recalling of large rupee notes had tested Indian’s patience, but the negative impact of the surprise move seems to be over. And the benefits are helping the economy. Voters appear ready for economic reforms that the government wants to make, foreign investors expect faster reforms. The rupee has traded stronger for some months now, but it’s likely that it’s run out of momentum.
Inflation in India rose by less than expected in March because food prices unexpectedly came down in March to 1.93% from February’s 2.01%. This will change once summer comes, though, when food prices will probably spike. Housing and fuel each climbed by around 5%, indicating India’s economy was ready for the interest rate hike it just had. The Reserve Bank of India (RBA) unexpectedly tightened their monetary policy last week in an effort to fight rising inflation. The easing of inflation this month now gives RBA governor Urjit Patel time to consider what monetary adjustments the bank might make to strengthen the $2 trillion economy. Although investment is up, industrial production is uneven. India’s factory output increased by 2.7% in January, then it fell by 1.2% in February. But the economic outlook is bright for India.