Sterling Stronger after ‘Michael Fish’ Moment
MPs grilled Bank of England officials yesterday, questioning Chief economist Andy Haldane’s statement that forecasting economic crisis is like BBC weatherman, Michael Fish’s downplaying the UK’s great storm of 1987. The pound wasn’t bothered that the bank didn’t convince MPs that it can predict future events, hitting a 2-month high against the weakened euro. Today’s just released GDP was a mixed bag: quarterly growth was above expectation, but lower for Year-on-Year GDP with 1% less business investment for the last quarter.
The US dollar rose yesterday following a pair of Federal Reserve policymakers’ comments increased the likelihood of an interest rate hike next month. This seems to be the start of a rally to return the dollar to the strength it enjoyed after Trump’s surprise victory in November.
Pound Sterling – UK Markets
Today’s GDP release shows that the UK economy expanded faster than expected in the last quarter of 2016. The Services sector was largely responsible for Britain’s fastest quarterly growth in a year. The release of the mixed data clipped the recent strength Sterling had against the dollar as the good news for the quarter was offset by lower Year-on-Year GDP as well as concern about the future implication of falling business investment figures.
Among the news points from yesterday’s testy exchange between Parliament MPs and Bank of England’s economic team include the bank admitting that, although there have been improvements to forecasting economic events, the next crisis won’t likely be accurately predicted. The bank refused to take responsibility for the effect quantitative easing has on house prices.
Yesterday’s release of borrowing figures will make presenting his 8 March Spring Budget that much sweeter for the Chancellor Philip Hammond. He’s in the enviable position of having the highest January surplus in 17 years at £9.4 billion with net debt lower than this point last year. At £49.3 billion for the financial year-to-date, borrowing is at its lowest rate since the same period in 2008. There’s speculation that the chancellor’s may use this extra money to fund more NHS programs or lessen the business rates in April’s revaluation. Or, he may keep it aside toward a Brexit rainy day.
US Dollar – US Markets
The US market seemed rested and ready after the long holiday weekend, opening to record highs due to better than anticipated earnings reported from retailers Wal-Mart and Home Depot as well as rising crude oil prices. Yesterday’s release of US Manufacturing and Sales PMIs both disappointed the forecasts, showing growth slowed in February. Although the economy added 165,000 jobs, business optimism over the outlook for the coming year fell sharply showing companies are cautious about adding expenses.
Today’s Federal Open Market Committee speech is expected to increase the odds of a rate hike, which will continue fuelling the rising greenback. Analysts debating the merits and risks of Trump’s proposed Border Adjustments for Corporate Tax (BAT) note that it would effectively raise the dollar’s exchange rate, though opinions vary on how high it would rise. This presents the risk of pricier imports and nullifies Trumps wish for a weaker dollar to strengthen exports. However, a BAT with a 20% tax rate would benefit the Treasury, raising about $120 billion annually, or 0.6% of GDP.
Euro – European Markets
The euro wasn’t bolstered by Germany’s better than expected PMI report nor dented by France’s weaker than expected figures yesterday because the sheer scope of Greece’s debt overshadowed the market climate. The current crisis having been averted by yesterday’s emergency meeting in Brussels with the Greek Finance Minister. The spectre of a Greek default—which could shatter the EU—can’t be quickly erased, as it’s likely Greece will continue requiring bailouts into 2018. Today Greece’s key creditors, German chancellor Angela Merkel and International Monetary Fund’s head, Christine Lagarde, meet in Berlin. They’re seeking to end an impasse over the seemingly endless austerity measures and reforms that crush any hope of economic recovery ahead for Greeks.
The weakened single market currency has sunk to a 2-month low against Sterling this morning, largely on fears that Marine Le Pen continues gaining support for a French Presidency. Also, it appears Russia is repeating the interference tactics it used in the US to increase support for Trump’s candidacy. Front runner Emmanuel Macron and French intelligence officials believe the Kremlin to be using cyber-attacks to aid a victory that would change the shape of Europe. Political risk knocked the euro to its lowest level against a basket of currencies since November. It rose on the stronger than expected Eurozone growth figures from Germany and Italy, but the outlook is for continued weakness until France’s elections conclude.
Other Currencies – Highlights
UK Trade Secretary Liam Fox is in Singapore today having just renewed the bilateral Economic and Business Partnership with Singapore’s Minister of Trade and Industry. The UK is Singapore’s 4th largest trading partner with the total bilateral trade valued at $11.4 billion Singapore Dollars ($GD). Singapore’s economy relies on foreign exports, recording a trade surplus of 3.29 $GD in January, down from a surplus of 5.1$GD the previous year. This was the smallest surplus since last February, caused by an 11.1% increase in exports and a 21.0% surge in imports.
China and Japan were the Asian countries that Donald Trump accused of devaluation, but more accurately he’d have pointed his finger toward Taiwan, Korea and Singapore. If he sought to punish these smaller currency manipulators, it would have a devastating effect on regional trade. Since they dominate the global trade in semiconductors and displays, this would disrupt those global marketplaces. The Singapore dollar is undervalued by 28%, according to the Peterson Institute.