Sterling Strong as ‘Trumpflation Trade’ is Tested
Yesterday, Sterling enjoyed a boost of strength on the news that inflation surged by more than expected. The pound is at a 4-week high against the US dollar, while the euro has hit a 6-week high against the greenback.
US President Trump’s honeymoon seems to be over as the US dollar is in its longest drop since November. Global stocks have fallen as investors lose faith that his pro-growth policies can gain Congressional approval. Trump’s refusal to ‘show more respect for the truth’ has been criticised by The Wall Street Journal which warned he may soon be seen as ‘a fake president’.
Pound Sterling – UK Markets
The pound rose on yesterday’s news that inflation increased by more than expected, making it more likely that the Bank of England (BoE) might raise interest rates sooner rather than later. Factors holding the BoE back from raising rates include shrinking wage growth and the recent slowdown in employment growth. And UK consumers aren’t spending at the same rates they had immediately following the Brexit vote. Households facing increasing fuel and food prices are likely to cut high street spending this year. The UK’s Trades Union Congress (TUC) warns that the government risks another living standards crisis as inflation, now outpacing wage growth, means workers are losing in terms of real pay.
The CBI manufacturing survey shows optimism is at a 22-year high, as the weak pound keeps exports competitive. The pound’s 15% fall in value has made London the least expensive major global centre to visit with affordability at its best levels in 20 years. London’s much cheaper for tourists than New York, Paris or Tokyo, even as prices rise for people who are paid in pounds. The report by the Economist Intelligence Unit (EIU) calculates its rates by comparing over 400 prices for a range of products and services which are then converted into US dollars, before being compared to New York’s cost of living.
US Dollar – US Markets
The dollar’s strong drive after President Trump’s election has hit a wall. Wall Street suffered its worst day of the year yesterday, with financial stocks, in particular, seeing a huge sell-off. In Trump’s haste to replace Obama’s Affordable Care Act, the Republicans have produced a bill that’s unlikely to pass tomorrow’s vote. Republicans aren’t likely to endorse the healthcare plan that a Congressional Budget Office review found would cost 24 million Americans their healthcare insurance over the next decade. The healthcare bill is the biggest event for the Republican party this year, however, that’s unlikely to convince moderate party members to vote for a bill that was given last minute amendments to increase its appeal to hard-line conservatives.
The US President’s credibility has been damaged after a House Intelligence Committee hearing failed to support his charge that he’d been the target of surveillance by former President Obama. FBI Director James Comey’s revelation that Trump’s campaign has been under investigation since July was a bad start to a crucial week for the White House. Conservative-leaning publication, The Wall Street Journal has assailed Trump in an editorial that questioned the President’s credibility as he refuses to back down from his claims ‘like a drunk to an empty gin bottle’.
Euro – European Markets
The euro hit a 6-week high against the dollar, yesterday, after Emmanuel Macron’s strong performance in the French election debate. In an opinion poll taken after the debate, Macron came out as the clear favourite in an election that’s critical to the Eurozone. Anti-euro populist candidate Marine Le Pen is still expected to make it through the first round which is set for 23 April. It’s not clear who, along with Macron, will be one of the final 2 candidates on the 7 May, runoff.
French presidential candidates have echoed US President Trump’s complaints about Germany’s massive trade surplus, saying that the country unfairly benefits from its EU membership. Germany, as the Eurozone’s largest economy, has been the biggest beneficiary of the European Central Bank’s (ECB) Quantitative Easing (QE) programme. As the largest exporter, much of the over €1 trillion in new cash that the central bank printed has helped German businesses. As QE will be winding down, those businesses won’t have the additional support, so German economists are endorsing domestic investment to keep Germany’s economy rolling. They recommend raising wages to increase consumer demand and investing in infrastructure that increases production capacity. In the short-term, this would increase imports, narrowing the trade balance. Although raising interest rates will make German goods more expensive, since the euro will gain value, it would help Germany in the long run since it increases investment in euro-denominated savings certificates.
Other Currencies – Highlights
As the Asian markets reconsider ‘Trumpflation trade’, the dollar dropped to a 4-month low against the Japanese yen.
Japan’s fiscal challenges include coping with what economists call a ‘demographic time bomb’ that’s helped shrink the country’s economy over the past 25 years. As Japan’s birth rate drops and elders live longer, 26.7% of Japan’s population of 127.11 million people is over 65. One fifth of crime is petty theft committed by the elderly who prefer living in prison, which functions as a nursing home, to living alone. An October poll of 10,000 workers found more than 20% surveyed work at least 80 hours of overtime a month. The government is encouraging people to leave work on time and take a day off in response to rising cases of karoshi, or ‘death from overwork.’
Japan and Russia are returning to territorial negotiations that ceased when Russia annexed Crimea and Japan joined the West’s imposition of economic sanctions against Russia. On Monday, the country’s foreign ministers agreed to renew negotiations about returning elderly Japanese natives to the disputed islands that have been under Russian control since WWII. Although they can align as defensive partners against North Korea, the 2 countries can’t fully resolve their differences because Japan relies heavily on the US. Prime Minister Shinzo Abe said that US President Trump encouraged him to improve his relations with Vladimir Putin. President Obama discouraged Abe from improving ties with Russia, although this is one of the PM’s long held diplomatic goals. In Brussels, yesterday, Abe pledged to seal an EU trade deal quickly in a stand against the Trump administration’s protectionist posturing at the G20 summit.