Pound Falls on Brexit Uncertainty
The Pound fell against both the US Dollar and the Euro as the UK government’s unclear position fuels further Brexit uncertainty. Speaking to the Treasury Select Committee (TSC), Chancellor Philip Hammond said that he isn’t setting aside contingency funds for Government departments in the case of no deal in the Brexit negotiations. Theresa May has already, however, stated that no deal is better than a bad deal. Hammond added that, in the case of a no-deal scenario, flights between Britain and the EU could be halted, with the British Airlines Passengers Association (BALPA) agreeing with him.
Theresa May has had a lot of difficult moments in the past months and yesterday she had to face another one when, in a radio interview, she was asked what she would vote in another “Brexit or not?” referendum. May utilised her rhetorical talent to avoid giving a clear answer. It should be noted that May voted in favour of “Remain,” before becoming the Prime Minister. The opposition parties took the opportunity to say that her response shows that even Theresa May is not certain about the approach to Brexit.
In Europe, Carles Puidgemont called for the start of new talks between the Catalan regional government and the Spanish federal government of Mariano Rajoy. Puidgemont suspended the move for independence as long as there are talks with Madrid, pressed by the lack of support around the Catalan independence cause and the potential problems that could occur in the Catalan economy by the relocation of major companies.
Pound Sterling – UK Markets
Today, the Pound inched lower against the US Dollar with the exchange rate set at $1.31. Sterling also slumped against the Euro with the exchange rate set at €1.11.
The UK’s Office for Budget Responsibility (OBR) said in a statement that it expects to significantly downgrade its projections for productivity growth in the next five years. The OBR’s report notes that abnormally low interest rates could be weighing on productivity growth because they allow weak firms to survive. The OBR also expects that Brexit uncertainty will take a toll on investment prospects. A revision of productivity growth forecasts will be a problem for Theresa May’s government in its effort to reduce the deficits. The Chancellor Philip Hammond is expected to present an annual budget in the end of November.
Hammond, answering to questions by the Treasury Select Committee (TSC), said that Britain should be prepared for a no-deal outcome in the negotiations with the European Union, although this isn’t the government’s preferred position. The Chancellor noted that the IMF growth forecasts show how the economy is affected by Brexit uncertainty. He noted that the UK has fundamental problem with productivity and that the economy is robust, despite the “cloud of uncertainty around it.”
US Dollar – US Markets
The US Dollar retained its value against the Euro with the exchange rate set at €0.84. The US Dollar Index (DXY) retreated to the 93.19 level. The brawl in the Republicans camp between Donald Trump and Senator Bob Corker, and the uncertainty around the Fed Chair Janet Yellen’s successor, made the US currency suffer.
Some days ago, Corker, who is the Senate’s Foreign Relations Committee chairman, had said that Trump’s careless eruptions on Twitter and his general behaviour could cause a World War III. President Trump counter-attacked by tweeting “the failing NY Times set Liddle’ Bob Corker up by recording his conversation. Was made to sound a fool and that’s what am I dealing with.” The new crisis in the Republican party shows that two camps have been formed with Trump loyalists on one side and the conservative older members on the other. Investors are worried that the rift will jeopardise the passing of the new US tax reform that is expected by global markets.
According to CNBC sources, the US is going to propose tougher standards for the content origins of manufactured goods in the upcoming fourth round of negotiations for the new North American Free Trade Agreement (NAFTA) treaty. The US officials will ask for 85% of the content to come from the US, Mexico and Canada. The current requirement stands at 62.5%. The fourth round of negotiations between the three countries starts today with the Mexican president Luis Videgaray warning that his country won’t remain in the treaty if it’s not good for it.
The head of the Dallas Federal Reserve, Robert Kaplan said that he will be looking for evidence of progress in US inflation as he weighs future hikes. Kaplan added that sluggish growth is the biggest threat to the US economy. Market analysts are expecting the release of the Federal Open Market Committee (FOMC) minutes, later in the day, to read what was said among participants about the recent inflation weakness.
Euro – European Markets
The Euro remained stable against the US Dollar with the exchange rate set at $1.18. The whole Europe stood still as Carles Puidgemont delivered a speech in the Catalan regional parliament yesterday evening.
Puidgemont, threatened by the Spanish federal government and pressed by rumours that large companies are preparing to relocate out of Catalonia, signed a symbolic declaration of independence, but immediately called for new talks with Mariano Rajoy’s government in Madrid. Puidgemont practically suspended the move for independence with markets feeling relieved that the situation didn’t deteriorate for the time being. Spread yields between the ten-year Spanish and German government bond retreated to lower levels, after spiking in the last week as the tension was rising. The Spanish stock market index IBEX gained more than 1% in its opening as investors were feeling more optimistic that the problem will be resolved without extreme measures.
ING economists said in a report that they see the opportunity for the Euro to strengthen ahead of the European Central Bank’s meeting in the end of the month. They noted that Puidgemont’s move is considered conciliatory, and that the developments in Spain combined with the possibility of a hawkish ECB tapering announcement could boost the single market currency. Frank Smets, who is the ECB’s Director of General Economics, said that he favours an extended quantitative easing (QE) tapering, and added that the QE recalibration should be gradual and cautious.
Other Currencies – Highlights
Sterling weakened against the Australian Dollar, trading at 1.69 AUD. The International Monetary Fund (IMF) slashed Australia’s growth forecast for 2017 in its latest report. The IMF expects the Australian economy to expand 2.2%, instead of 3% that was forecast six months ago. IMF economists suggest that the drop is attributed to bad weather conditions, more specifically, Cyclone Debbie that disrupted mining activities. The report also warns that wage growth will remain weak because the structure of the labour market has changed in the last few years.
The Pound fell against the New Zealand Dollar, trading at 1.86 NZD. Winston Peters, the leader of NZ First party met with the leadership of the National party to make progress in the talks about forming a coalition government. Peters refused to say if the creation of a depositor guarantee scheme for majority New Zealand-owned banks was discussed. Right after the elections, Peters warned of the economic risks from the influx of foreign funds in New Zealand’s banking system and stressed that a depositor guarantee scheme should be considered.
Sterling dropped against the Japanese Yen, trading at ¥148.26. The Nikkei Stock Index in Tokyo hit a 21-year high last night. In the last month, Nikkei has surged 10% fuelled by the optimism for the global economy and aggressive stock buying by investors.