Germany Beats UK GDP
Germany’s GDP data yesterday showed that Europe’s powerhouse surpassed the UK’s and the US’s growth last year. Sterling slid against all of its major peers, in spite of a good January consumer release that warned of Brexit challenges ahead.
US Treasury Secretary Steven Mnuchin offered the first clues regarding US President Trump’s crucial tax plan, describing it as being focused primarily on middle-income tax cuts and simpler business codes. He effectively took a BAT to the dollar which dropped when he said he was concerned about it strengthening if the Border Adjusted Tax (BAT) policy was implemented. The greenback was pulled further down when the FOMC minutes dampened expectations of a dollar strengthening interest hike in March.
Pound Sterling – UK Markets
Retailers were pessimistic about their prospects for 2017 according to CBI’s Distributive Trades Survey which indicated that sales are set to deteriorate over the next 3 months. In the most dismal prediction in 4 years, 87.7% of shops indicated their costs per sales have gone up compared to last February. The gloomy forecast overshadowed the data showing that 40% of retailers had a rise in sales volumes over February 2016, in which 31% saw volume decline. Although better than January’s 8% decline, rising costs, such as petrol, will curtail profits even if sales continue. Oil’s recent rise to a 3-week high will soon be felt down the food chain. Considering that wages aren’t rising at the rate of inflation, increases in prices such as air fares rising by 48.9% since last December will mean shoppers must budget more carefully this year.
UK coal production fell to a record low last year, slumping to 51% as large mines closed. Over the last 5 years’ coal production has been reduced by 77%. Losing importance as an energy source, coal powered 10.6% of UK electricity last year, compared to 25.8% in 2015. Brexit and the fall in the pound’s value were blamed for an increase from 12,000 to 39,000 in Eastern Europeans leaving the UK, in the year up to September. The vacancies in retail, hospitality and manufacturing is another post-Brexit concern for business.
US Dollar – US Markets
New US Treasury Secretary Steven Mnuchin has said the Trump’s administration’s priority is achieving 3% growth and to that end he’s committed to passing ‘significant’ tax reform that make business tax ‘competitive with the rest of the world.’ Acknowledging his concerns regarding a major sticking point, the Border Adjustment Tax, he revealed his preference for a weaker dollar. Mnuchin echoed Trump’s earlier comments about the US National debt, indicating that frugality, rather than fiscal spending is planned with increased military spending being the exception. President Trump described the trio of his priorities in the budget blueprint he’ll release mid-March as slashing spending to reduce debt, replacing the Affordable Care Act and a sweeping tax reformation plan.
The US dollar fell to a 3-day low on a trio of factors: Mnuchin’s comments about wanting a weak dollar, FOMC’s minutes tamped down expectation of a March rate hike and a disappointing jobs data release. Although the US employment remains at a historically low level, the dollar wasn’t helped by larger than anticipated jobless claims. The data points out today, including new homes sales figures, aren’t going to make much difference to the dollar which is falling as the peso rallies. Mexico and Canada’s currencies will be volatile ahead of any concrete trade deal policy plans since both rely on the NAFTA trade deal’s continuation. US Secretary of State Rex Tillerson’s visit to Mexico was a delicate balancing act between reassuring Mexican President Enrique Pena Nieto that the US wished to strengthen the ‘trade and energy relationship’ while President Trump was simultaneously describing his Mexican immigration plans as ‘a military operation.’ Mexicans, incensed by Trump’s rhetoric, must temper their rage with Trump’s plan to deport all illegal immigrants, regardless of their nationality, into Mexico, in order to protect their $580 billion annual trade partnership with the US. Next week, Tuesday will be the dollar’s big day when President Trump appears before Congress.
Euro – European Markets
Yesterday, EU critics seized upon Germany’s budget surplus of €23.7 billion in Germany’s GDP release, pointing out the Northern bias that’s been noted, as those EU member states have benefitted more from the Union than the southern economies have. The euro has no major data releases of any importance today, and the market jitters seen earlier regarding the French elections have dissipated, for now. The European Central Bank (ECB), analysts note, are increasingly more united in their statements, speaking more as a collective team under the threat of fracture. Yesterday, the ECB’s chief economist Peter Praet said that Brexit would significantly impact bilateral trade and negatively impact investment. He warned against blind optimism saying ‘these things can turn nasty quite quickly’.
In a warning to Marine Le Pen supporters, the Deutsche Bank argued that her comparing Frexit to Brexit was erroneous given the risk that it could destroy the currency, jeopardising €46 trillion in unhedged gross cross-border currency. Deutsche said that the dire predictions Le Pen mockingly attributed to Brexit sceptics: ‘the stock markets would crash’ and ’economy grind to a halt’ would actually take place in the unlikely event of her pulling off a Frexit. The bank predicts the euro to US dollar pairing to decline to 0.95 by year end, assuming she loses the election.
Other Currencies – Highlights
The Swiss franc, like clockwork, has followed the same pattern for the past five Februaries: market volatility. This week the Swiss franc dropped ahead of January’s Trade Balance report that smashed expectation of a modest trade surplus increase to 3.030 million, turning in an impressive gain of 4.730 million, instead. This shows why the ZEW Survey measuring business expectations came in so nicely at 19.4 up from a last reading of 18.5. Yesterday’s disappointing Swiss Industrial Production data revealed, however, that Switzerland’s industrial output declined by 1.2%, denting CHF’s strength.
President Trump called China the grand champion of currency manipulation, but he’s failed to criticise the currency that was devalued in reaction to his winning the US election—the Swiss franc. The Swiss National Bank (SNB) also devalued the currency after Brexit. The CHF is the safe-haven in uncertain times, so rather than let CHF rise so high that it threatens trade, the SNB devalues it, by selling 9% of the country’s GDP a year in francs. Is Switzerland actually a currency manipulator? It soon may be, when its trade surplus with the US rises from its current $13 billion to $20 billion, as is expected in 2018. If Trump were to respond with a punitive 20% import tax, economists expect SNB would be better off curtailing their devaluation practice, ending the era of CHF as the ultimate safe haven currency.