Sterling Spooked by US Strikes on Syria
The pound, and global markets, are reacting nervously to US President Donald Trump’s missile strike on a Syrian airbase which is believed to have been the source of a chemical attack on civilians. Today’s disappointing data shows a slowdown in the UK economy which is further trimming the pound. Also, Bank of England’s Mark Carney is speaking in defence of the City retaining its ability to trade euro, in his bid for a soft Brexit.
The dollar is down against the Japanese yen as investors seek the stability of a safe-haven currency following the US’s toughest direct action in the 6-year Syrian war. President Trump’s summit with Chinese president Xi Jinping seems to be very friendly, although there haven’t yet been any concrete decisions made on North Korea or trade.
Pound Sterling – UK Markets
Sterling dropped following the release of lower than anticipated industrial production figures today that suggest the UK’s GDP growth is slowing down. The surprising drop in the UK industrial production figures is being partly blamed on unseasonably warmer weather, although other factors include a decrease in spending. Manufacturing output also came in at less than had been expected. Also, the UK’s trade deficit is the largest it’s been since last September. Today’s speech by Bank of England’s governor Mark Carney focused on keeping the UK’s financial access to EU after Brexit. He pointed out that the UK has spent years developing financial reform, making his case for London retaining its ability to trade in euros. It’s critical for the City economy since around £440 billion in euro-denominated trade is made daily in Britain.
The pound is at the mercy of Brexit negotiations, according to a poll of foreign exchange experts in a Reuters report. They said the pound could sink to $1.10 or rise to $1.50 this year, depending on how hard or soft the UK’s Brexit deal is. The other risk they see for the pound is the US increasing interest rates which the Bank of England isn’t likely to do until 2019. Sterling’s future strength is tied to the next 2 years of Brexit negotiations, according to a Reuters poll of 60 foreign exchange strategists. They had accurately predicted Sterling’s fall of 10% in value after the 23 June Brexit vote. They now see Prime Minister Theresa May’s promise to limit freedom of movement will likely block the UK’s access to the single market, which would damage trade.
US Dollar – US Markets
The US dollar slipped against the Japanese yen after the US launched missile strikes on a Syrian airbase. The sharp increase in geopolitical tension sent nervous investors into safe assets in Asian markets this morning. Oil prices rose by over 2%. Russia demanded a UN meeting over what it terms an ‘act of aggression by the US’, although it had been warned the US was going to launch over 50 missiles into a base in which Russian soldiers were stationed. Trump had just reshuffled his national security cabinet, removing his chief strategist Stephen Bannon, so there hasn’t been time to prepare a long-term strategy. Trump was friendlier with Chinese President Xi Jinping than he’d been with German chancellor Angela Merkel. At his Florida resort, the two smiling leaders seemed chummy ahead of discussions about their defence strategy towards North Korea and Trump’s promise to be tough with Mr Xi on trade.
US retail brand Payless Shoe Source’s recent bankruptcy highlights the trend towards shopping online that’s creating a ‘retail apocalypse’ for the biggest, most iconic US retailers. Macy’s and Ralph Lauren are among those closing hundreds of shops across the world in an effort to cut costs. By February, Standard & Poor had already lowered its rating 20 times on top retailers in 2017, anticipating ‘increased level of stress for the sector.’ The industry is expected to cut over 38,000 jobs this year, although these may be replaced by new positions in the internet retail market. Amazon.com has said it expects to create 100,000 jobs in the next 18 months. Yesterday’s weekly US jobs report posted the biggest drop in new jobless claims in nearly 2 years. With the unemployment rate at 4.7%, the labour market is near full employment. For 109 weeks in a row, there have been less than 300,000 claims. Wells Fargo expects that today’s Non-Farm Payrolls will show an increase in 191,000 jobs, which could strengthen the dollar.
Euro – European Markets
The euro slipped yesterday after the European Central Bank’s Mario Draghi disappointed German finance ministers who are pressing for the bank to consider raising the interest rates before the Quantitative Easing programme is reduced. One challenge the EU faces is that by having a single central bank, countries like Germany that would benefit from increased interest rates that help savers and investors, must patiently wait for the other countries in the bloc, like Greece, to improve their economies. There’s renewed optimism from German finance minister and Greece’s prime minister that an agreement on Greece’s debt will soon be reached. The deal giving Greece an additional €7.5 billion in new loans to avert a crisis in July isn’t yet finalised in time for today’s Eurogroup finance meeting in Malta, but it’s expected within a week.
Mittlestand, the group representing Germany’s small and mid-sized businesses, wants the UK to stay in the single market because a hard Brexit would also be harmful to them. German imported €89 billion worth of goods to the UK in 2015, with nearly half of it produced by German SMEs. The group also pointed out that 750,000 German jobs rely on trade with the UK.
Other Currencies – Highlights
The South African rand has been decimated by President Jacob Zuma’s sacking finance minister Pravin Gordhan. The economic crisis it caused compelled Standard and Poor to downgrade South Africa’s investment status to junk. Moody’s was already planning to drop their rating to junk today, on 7 April. The African National Congress (ANC) has decided to support Zuma, but opposition parties are certain to keep South Africa in political turmoil, which isn’t going to encourage much-needed investment in the country. Critics of the ANC leader’s corruption called for his immediate removal-dubbed a ‘Zexit’. He’s still able to out manoeuvre opponents, but dissenting voices are rising.
The rand lost almost 30 cents to the US dollar on news that there wouldn’t be a Zexit after the currency had lost 10% in the previous week. It’s believed that Zuma fired the finance minister so that he could have more control over the treasury. Zuma has called on the government to welcome investment, but the down grading means that pension funds must sell their shares of government debt, because of the increased risk. The cracks appearing in the form of the rand falling and bank shares being sold off are economic early warning signs. Increasing inflation will drive up interest rates and more expensive borrowing will cut business investment. Growth of nearly 1% was previously expected this year, now there’s more likelihood of recession.