No Valentine from Mexico for Trump
Sterling’s strong start this week was pulled down by today’s release of UK factory input prices. The pound’s loss of 20% of value since Brexit has resulted in the largest increase of factory prices since 2008. Inflation increased from 1.6% last month to 1.8% this month due to the fall in the pound causing rising import prices.
The US dollar is going from strength to strength ahead of Federal Reserve Bank Chairwoman Janet Yellen’s testimony before the Senate banking committee today and tomorrow.
Pound Sterling – UK Markets
Ahead of the data released this morning, sterling was at a six-week high against the euro. The pound to US dollar slipped below 1.25 after the release showing Britain’s Consumer Price Index (CPI) inflation rate is at its highest level since June 2014. Today’s inflation rate release immediately trimmed the pound to US dollar by half a cent, which is a vicious cycle since the fall in the pound is fuelling inflation. Also, out today is news that the fall in the pound and a bribery settlement payment of £671million cost Rolls-Royce a historic loss of £4.6 billion in 2016.
On Monday, the European Commission said that the British economy will almost halve expansion by 2018. The report predicts that Britain will pay the price for Brexit uncertainty, with a GDP growth shrinking from 2.0 in 2016 to 1.5 this year and 1.2 for 2018. Sterling’s drop in value is feeding rising inflation, forecast to rise to 2.5% this year. Taking on board the UK’s resilience, the report was more optimistic than the November release, but it pointed out a pair of challenges: a decrease in business investment and drop in consumer spending. These would combine to increase unemployment from 4.9% last year to 5.6 in 2018.
Research by the Resolution Foundation indicates that, pensioners are now, thanks to private pensions and higher benefits, earning £20 a week more than working households. This prosperity was enjoyed by retirees who have an occupational pension, own their own home and are still earning an income whereas those in the poorest 5th of all households don’t fare so well, especially those relying exclusively on benefit income.
US Dollar – US Markets
The US dollar continues to sport the bullish gains it’s made with President Trump in the White House. Market growth rose buoyantly on the back of ‘Trump trades’ as investors put their bets on the US president keeping his promise to reform taxes to the benefit of economic growth and corporate profits. After Trump’s 2-day meeting with Japanese Prime Minister Shinzo Abe failed to embroil him in squabbles about trade, currency or security issues, the markets reacted by rallying to their longest winning stretch for 2 months. This gain in risky assets like stocks was the Japanese yen’s undoing and it was one of the weakest of the major currencies.
President Trump’s new ‘conformity’ with Abe to established US foreign policy was a relief to the market, further strengthening the dollar. This adds to speculation that Federal Reserve (Fed) Chairwoman Janet Yellen will present a case for raising the US interest rates with several adjustments throughout the current year. Her comments will be scrutinised for hints, in her first semi-annual Monetary Policy testimony before the Senate Banking Committee and House Financial Services Committee today and tomorrow. Aside from discussing monetary policy, she’ll likely address concerns Trump has raised about the Fed’s independence. Trump harshly criticised Yellen for not raising interest rates, accusing her of doing so for political reasons, risking a blow to the stock market when the rates are raised. The Fed was on track to raise rates, but hesitated due to unexpected events such as Brexit. Trump said her delay put the US in a risky ‘bubble’, and that he’d replace her.
Euro – European Markets
The euro rose to the pound, bouncing off 2-month lows on the back of the release of the UK’s lower than expected CPI figures which weakened the pound.
Appetite for the euro has been waning as Marine Le Pen strengthens her bid for the French presidency. France’s central bank chief said that Le Pen’s plans to take France out of the Eurozone would increase the country’s debt costs by €30billion a year. Recently, investors have been selling off French government bonds as fears arise that far right Le Pen could win the presidential election in May. Her plans include dropping the euro and having the central bank support a state spending spree that the bank opposes. Her plan threatens the bank’s independence and puts France at risk of defaulting on its debts. European Commissioner Pierre Moscovici said yesterday that ‘France leaving the euro area would be a tragedy for the euro-zone and a catastrophe for France’.
Other Currencies – Highlights
The US hasn’t enjoyed good relations with its neighbours since Donald Trump was elected. Mexico’s peso, seen as a proxy for Trump’s presidential prospects, plummeted 12% to a historic low in the wake of his victory. Trump’s considering imposing a 20% tax to fund a border wall that would cost up to $15 billion. Americans would, in fact, fund it as 6 million US jobs would be in jeopardy and prices for a litany of products would skyrocket. In 2015, over 80% of Mexico’s exports went to the US, valued at $295 billion, and accounting for 13.2% of all US imports. Anti-Trump protests took place in 18 cities across Mexico on Sunday, February 12 in reaction to Mexican nationals being deported from the US.
Canadian Prime Minister Justin Trudeau had his crucial first meeting with his southern neighbour’s leader, yesterday. The two countries are launching a taskforce promoting female business leaders and entrepreneurs that includes President Donald Trump’s daughter Ivanka, who assisted in recruiting the participants. Trudeau must convince Canada’s key trade partner not to terminate critical aspects of the North American Free Trade Agreement (NAFTA), the deal between the US, Canada and Mexico, which Trump promised to overhaul. Canada could lose some $70 billion in trade with the US which accounts for 3/4 of Canadian exports.
He also hoped to dissuade Trump from the border adjustment tax he’s considering that could cause Canada’s GDP to drop by a whole point. It’s already shrunk due to widespread manufacturing weakness and declines in oil and gas extraction. Lower oil prices, Canada’s major export, caused Canada’s central bank to cut interest rates twice in 2015. Canada’s dollar is at the mercy of Trump’s first 100 days in office, having borne the brunt of his election win, it fell to an 8-month low on NAFTA fears. Yesterday, Trudeau’s start toward convincing Trump not to tear up NAFTA, boosting the Canadian dollar slightly.