Sterling Drops After May’s Speech
Sterling dropped against the Euro and, to almost a one-month low, against the US Dollar, as Theresa May’s speech in the Tory conference yesterday seems to have totally backfired. The speech was intended to strengthen her leadership, but a series of unfortunate events turned it into a nightmare for the British prime minister. The Telegraph wrote that some MPs are ready to ask for the Prime Minister’s resignation, while Downing Street rushed to say that “resignation isn’t an issue.”
In the US, Donald Trump and his staff aren’t on the same page in a lot of matters and Puerto Rico is one of them. Trump promised to erase Puerto Rico’s enormous government debt, during his visit on the hurricane stricken island. However, Mick Mulvaney, who is the White House budget chief, said that “we aren’t going to bail them out. We aren’t going to pay off those debts. We aren’t going to bail out those bondholders.”
Pound Sterling – UK Markets
Today, the Pound dropped against the US Dollar, reaching a one-month low, with the exchange rate set at $1.31. Sterling also fell against the Euro with the exchange rate set at €1.12. Yesterday’s boost after the positive Services Sector PMI data was ephemeral since Brexit concerns and uncertainty in the UK politics resurfaced.
According to data published by the Society of Motor Manufacturers and Traders (SMMT), car sales in the UK recorded a 9.3% decline, in September. This was the sixth straight month that car sales dropped and the first September with a recorded decline in the last six years. The slump indicates that car registrations have fallen almost 4% since the start of 2017, when compared to the previous year. Mike Hawes, SMMT’s chief executive, said that “business and political uncertainty is reducing buyer confidence, with consumer and businesses more likely to delay big ticket purchases.”
A report published by the ING suggested that the Tory conference created more uncertainty than clarified things. ING analysts stress that more confusion was created over the government’s Brexit transition deal strategy and that the ongoing questions over Theresa May’s leadership will limit the effect of any change in the Bank of England’s (BoE) policy. The Confederation of British Industry (CBI), commenting on Theresa May’s speech, noted that the government should act to agree the standstill transition with EU partners by the end of the year.
US Dollar – US Markets
The US Dollar edged lower against the Euro with the exchange rate set at €0.84. The US Dollar Index (DXY) recorded a minor drop, coming in at 93.47. A series of data releases regarding the trade balance and jobless claims as well as some scheduled speeches by Federal Open Market Committee (FOMC) members, later in the day, are expected to affect the Dollar.
Janet Yellen, the Fed’s Chair, delivered a speech at the annual Community Banking in the 21st Century research and policy conference, but didn’t refer to the economy’s outlook or to the possibility of an interest rate hike. Yellen said that the Fed is working to ensure that regulations are tailored to the size and the complexity of the lenders it oversees. Yellen noted that community banks avoided risky business practices in the past, which saves them from having to deal with burdensome regulations. President Trump has repeatedly said that he wants to reduce bank regulations and some Fed governors note that requirements on community banks could be reassessed.
Federal Reserve Governor Jerome Powell, who is one of the strong candidates to replace Yellen, said that “there is a lot of room to reduce Volcker Rule burden on less complex institutions”, adding that he is confident that regulators will reach a deal on that. The Volcker Rule restricts US banks from making certain kinds of speculative investments that don’t benefit their customers. Powell refused to comment on his meeting with President Trump.
Euro – European Markets
The Euro edged up against the US Dollar with the exchange rate set at $1.17. The single market currency is gaining ground for third straight day, capitalising on the positive data coming from the Eurozone economy.
The yield of the ten-year Spanish state bond reached the highest level in the last seven months before easing off, as investors are afraid that the situation in Catalonia will deteriorate. Carles Puidgemont, who is the Catalonian president, said that independence will be declared on Monday. The Spanish Prime Minister, Mariano Rajoy, urged the Catalonian leadership to return to the path of the law. Luis De Guindos, the Spanish Minister of Economy, called the Catalonian government “insane” for its actions, and stressed that Catalan banks are Spanish banks, which means that their customers have nothing to fear.
The Federation of German Industries (BDI) issued a brief statement in which its board expresses its concerns over Brexit negotiations and the way they might affect German businesses. The BDI warns all German firms in the UK to make the necessary provisions for the possibility of a hard Brexit. The Federation accused the British government that it lacks a clear concept on Brexit, even though five months of negotiations with the European Union have already passed.
Other Currencies – Highlights
Sterling jumped against the Australian Dollar, trading at 1.69 AUD. The Aussie dropped when the Australian Bureau of Statistics (ABS) published disappointing data regarding retail sales in August. Analysts were anticipating a rise by 0.3% on a monthly basis, but the ABS report showed that they shrunk by 0.6%. This was the biggest drop recorded in the last four and a half years. Weak retail sales data overshadowed the better than expected trade surplus, which came in at AUD 989mln.
The Pound fell against the New Zealand Dollar, trading at 1.84 NZD. The Treasury published its final accounts, which showed that the budget surplus was slightly above expectations. This was the third consecutive time that the government managed to post a surplus. Finance minister Steven Joyce said that the surplus is “a direct demonstration of the benefits of a steadily growing economy.” The government has promised to use the money on infrastructure. However, Joyce said that, in the future, surpluses may not be wider than forecasts.
Sterling dipped against the Swiss Franc, trading at 1.28 CHF. The Swiss Federal Statistical Office released the September’s Swiss inflation data. Inflation came in at 0.7%, on a year to year basis, a bit higher than the 0.6% figure anticipated. On a monthly basis, inflation came in at 0.2%, in line with market’s expectations.