Merkel and Trump Talk Trade
Sterling jumped to a 2-year high on news that the Bank of England’s monetary policymakers are open to an interest rate increase to counter rising inflation. Although the bank left interest rates at a record low, the decision was split with one member voting for a rate hike. The bank expects inflation to exceed the 2% target soon but they’re not raising interest rates this year because it would further reduce spending, compounding Brexit challenges.
The US dollar is at a 3-week low after the US Federal Reserve’s announcement that future interest rate hikes will come at a gradual pace. Also, Trump’s budget proposal is raising concerns about his promised economic stimulus plans because it calls for $54 billion in cuts in domestic spending on urban infrastructure projects.
Pound Sterling – UK Markets
The pound spiked against the US dollar and the euro on the Bank of England (BoE)’s announcement they’ll keep interest rates at 0.25%. This was because the decision to keep rates on hold was split for the first time since last July with policy maker Kristin Forbes voting to raise them by just 0.5%. The 8 other members of the Monetary Policy Committee aren’t far behind Ms Forbes, and the bank said it would take ‘relatively little’ to convince them to raise the interest rate. An interest rate hike would raise the pound’s value, but it would also raise the cost of borrowing slightly. The votes were unanimous regarding maintaining the Quantitative Easing measures of £435bn in government bond purchases and up to £10bn in corporate bond purchases.
Yesterday, the Queen gave her official assent to the Brexit bill, the final formality before Article 50 can be triggered. Prime Minister Theresa May has squelched Scottish calls for an independence referendum before Brexit concludes, saying that it wouldn’t be fair for Scots to vote prior to knowing what the precisely agreements will be between the UK and EU. Attending the G20 summit in Germany, Bank of England’s governor Mark Carney has said the world’s executive finance ministers should make haste in completing international financial reforms to avoid repeating the 2008 financial crisis.
US Dollar – US Markets.
German Chancellor Angela Merkel walks into the lion’s den today when she pays her first visit to US President Donald Trump. Trump’s threatened to levy a tax on every Mercedes sold in the US and his trade advisor Peter Navarro says Germany is the US’s largest trade problem. She’s defended German companies, saying BMW’s US factory exports ‘more cars than GM and Ford together’. She’s accompanied by executives from BMW and Siemens who will help make the case that Germany has invested considerably in the US economy. With German polls showing 90% disapprove of President Trump, and Merkel facing elections this year, she mustn’t be seen to appease Trump.
President Trump’s preliminary 2018 federal budget proposal has very little support, even from members of his own political party. It’s unlikely to pass Congress with a cut of 28%, or $10.9 billion in State Department funding and other international programs that provide diplomatic solutions supporting national security. His plan to increase military spending by 10%, or $54billion has been criticised as not going far enough to re-build a depleted military. A 13%, or $16.2 billion cut to transportation would have a devastating effect on urban and rural infrastructure projects including rail, road, bicycle and pedestrian-friendly plans currently in the works across the whole country. The National Association of City Transportation Officials has called his budget a ‘disaster for cities and their transportation systems’. The budget breaks Trump’s promises to stimulate the economy with massive infrastructure projects.
Euro – European Markets
The euro reacted positively to the results of the Netherlands’ election, spiking higher on news that Prime Minister Rutte beat far-right Geert Wilders. There was good news for the Eurozone’s northernmost member when Finland’s Central Bank (BoF) raised their GDP forecast to 1.6% this year. According to yesterday’s release, last year’s growth was 1.4%. Finland came out of a 3-year recession in 2015 and it’s yet to fully recover following the collapse of Nokia’s mobile-phone business. Exports are finally increasing again after the economy has been supported by growth based on construction and private consumption. Also, the government’s labour pact cut labour costs, making Finnish products more competitive globally. The BoF credits the European Central Bank’s accommodative monetary policy for improving growth in the Eurozone and global markets.
Today’s G20 meeting puts international focus on Baden-Baden Germany where finance leaders meet for a 2-day summit. While German Chancellor Angela Merkel is in Washington, DC seeking an assurance on trade deal, Germany will echo her commitment by urging the 20 members attending the summit to a make free trade promises. This may be a point of contention for US President Trump’s representatives making their G20 debut. Bank of England’s Mark Carney is acting as the head of the Financial Stability Board at the G20. In this role, he’s establishing 4 priorities that help prevent a global financial crisis. He’s addressing risky shadow banking, derivatives trading, implementing post-crisis reforms and looking toward emerging risks.
Other Currencies – Highlights
The New Zealand dollar dropped by around one quarter of a US cent on news that the economy grew by less than had been expected this week. Economists expected a gain in Gross Domestic product of 0.7%, not the 0.4% figure which is the slowest pace of expansion since mid-2015. The annual expansion had been estimated at 3.2%, but the actual growth came in at 2.7%. This slowdown in growth shakes confidence in New Zealand Reserve Bank’s (RBNZ) 9 February projection that by mid-2017 growth would speed up to more than 4%. This month, Reserve Bank Governor Graeme Wheeler said that interest rates might remain unchanged at 1.75% for the next 2 years if the economy grew as he had expected it would. It appears, however, that the economy has slowed from its quickening pace in 2016 when the optimistic projections were made. Bad weather, as well as the November earthquake were also factors causing a decrease in milk production, as dairy exports dropped by a massive figure of 7.5%.
The New Zealand kiwi slipped against the Aussie dollar to the lowest levels since April 2016 on the report. Examined closely, the GDP news would have been even worse had it not been offset by an increase of 2.1% in services exports. Goods exports dropped by 6.0%, the largest quarterly fall since 1992. A recent report indicates that New Zealand’s NZ$14.5bn tourism industry, which accounts for a fifth of export income, urgently requires massive infrastructure investment. A booming 3.5 million tourists arrived last year-some 480,000 more than had been projected 2 years prior-as visitors increased by 12%. Many found no accommodation available and remote destinations’ sewerage systems were over-loaded by the population increase. It’s estimated that New Zealand needs to spend NZ$1.4 billion to upgrade infrastructure in support of the tourist trade which earns the government NZ$1.15 billion in taxes a year.