Sterling Resilient on Brexit Day
The pound wasn’t particularly bothered by the historical event of triggering Article 50, although it weakened slightly in the morning. It rose on yesterday’s news that the European Commission blocked the London Stock Exchange-Deutsche merger. Although there’s still the threat of a foreign buyer, it was good to know that the City’s £6.6 trillion in euro trade wouldn’t migrate to Germany after Brexit.
The US dollar has steadily strengthened after two more Federal Reserve members expressed confidence that the US will be able to handle a steeper series of rate hikes. Also, the setback President Trump suffered on the GOP healthcare plan debacle is being set aside today, as the focus turns to his tax reform plans.
Pound Sterling – UK Markets
Sterling stayed strong on the triggering of Article 50, and as details of Prime Minister Theresa’s 6-page letter came to light. She accepts that the UK cannot continue to have the same single market access it presently enjoys. She also accepts the UK will lose influence in making the rules that govern trade with EU partners. The Guardian reports that in a leaked European parliament resolution it’s been decided not to agree to a free trade deal with Britain for the next 2 years. Also, the transition period is limited to 3 years. The government has been criticised for threatening to withdraw security cooperation, pointing out that the word ‘security’ was used 11 times in the Article 50 letter and ‘trade’ only 6 times.
Today the markets seem paralysed by caution with uncertainty coming from several sources. First, there’s the political focus as the government publishes the Great Repeal Bill, detailing the removal of EU laws from the UK’s statue books. There’s also some concern that the EU’s response to Article 50 will take a hard-line approach. Also, the London Stock Exchange is still being eyed by both American and Chinese investors. Finally, Lloyd’s of London has come a long way from their start in a coffeehouse. They’ve confirmed they’re off with 100 of their staff to their new digs in Brussels which will be ready in time for 2019. The insurance market isn’t taking any chances on losing the ability to offer financial services, by taking the step to keep their European passporting rights. Tomorrow, the UK’s GDP data comes out, which could nudge the pound into some movement.
US Dollar – US Markets
The US dollar has continued to benefit after a pair of US Federal Reserve (Fed) speakers gave their support to additional US interest rate hikes this year. There’s a consensus that the economy is stronger and more able to handle a steeper pair of rate increases this year. Among the signs that it’s growing from strength to strength is February’s stronger than expected rebound in house sales. January sales, which fell by 2.8% might have been caused by cold weather, since February’s rebound to 5.5% coincided with an unusually warm month. Also, home buyers are aware that mortgages will soon be costlier as interest rates rise.
President Trump’s recent move to bring back the coal jobs he’d promised by dismantling programs at the Environmental Protection Agency has been seen as a short-sighted move that will cost many people their clean energy jobs. Trump promised ‘a new era’ in energy production, ignoring the shift to solar which employs roughly 260,000 persons compared to the around 70,000 jobs in the coal industry, according to 2015 figures by the US Bureau of Labour Statistics. American sentiment on climate change is split by political affiliations. A pew research poll in October found that 36% cared ‘a great deal’ about global climate change. Nearly three-quarters (72%) of this group were Democrats and almost a quarter (24%) were Republican. Trump has called climate change ‘a hoax perpetuated by China’.
China, who’s responsible for two-thirds of the world’s increase in carbon dioxide, is far ahead of the US in developing renewable energy it can use domestically and export. Under Trump, the US is handing energy innovation to China, its largest market competitor. On 6-7 April, China’s President Xi Jinping will visit President Trump to discuss trade, and possibly the Chinese leader will share his wisdom regarding the negative consequences of unregulated industrial production.
Euro – European Markets
The euro is weak against the pound today after a busy day in politics for both. In a press conference after receiving Article 50, President of the European Council, Donald Tusk said the EU’s goal is to ‘minimize the Brexit cost for EU-citizens, businesses and member states.’ EU Commission president Jean-Claude Juncker put the matter of the ‘divorce bill’ first, saying the UK owes £52 billion for current budget and future pension liabilities. The UK argues that the bill doesn’t factor in Britain’s share of assets in European buildings it’s helped fund in Brussels.
In her Article 50 letter, the Prime Minister asked for an early agreement to be made regarding a transitional period after the 2 years is up. This would eliminate the alarming notion of leaving without a deal. Chancellor Angela Merkel has disagreed with the government’s request to negotiate a new partnership with the EU as the current agreements are being disentangled. She wants to separate the process of breaking the agreements from the negotiations for new treaties. French president François Holland has joined Merkel in making this case. So much for Prime Minister May’s request to put the trade discussions before the break up.
Other Currencies – Highlights
Canada’s dollar fell just a tad after Bank of Canada (BoC) Governor Stephen Poloz shared his concerns about Canada’s economy. This suits him, as he’s speaking pessimistically in hopes of keeping loonie weak to help Canada trade more competitively. This week he was asked to compare Canada’s economy with its southern neighbour’s regarding raising interest rates. Canada’s interest rates were cut twice in 2015 and the BoC isn’t expected to raise them until next year, at the earliest. Poloz said that Canada would crash into recession if the BoC raised interest rates now, as the US is. He said the 2 countries shared a similar growth path, but that Canada still has a lot more economic growth it needs to make, despite the recent release of better-than-expected GDP, retail sales and employment figures. He warned against Trump’s trade plans saying protectionism ‘rarely succeeds’.
In 2014, Canada learned the hard way that it can’t rely too strongly on oil exports when the price of oil plunged from $100 a barrel due to a massive oversupply. The BoC calculated that the event wiped out about $60 billion of Canada’s national income amounting to a loss of around $1,800 for every Canadian. The Dakota Access pipeline President Trump has authorized is a bigger bonus for Canada than the US. It will bring cheap-$15-a-barrel Canadian sludge oil from Alberta’s tar sands which will flood the US market with some of the most polluting oil on earth because of its higher carbon intensity.