Strong Sterling to Euro and Dollar Rate
Sterling has settled after surging to a six-month high against the US dollar on the startling news of the 8 June General Election. Parliament’s vote to allow the early election by a margin of 509, increases expectations of a Conservative landslide win. This afternoon, the Bank of England’s Mark Carney may address ways to tackle the UK’s worrisome current account deficit.
Yesterday, the US dollar jumped to its highest levels in six weeks, after Federal Reserve (Fed) Vice Chairman Stanley Fischer offered his sunny views on the strength of the global economy. Today, it’s back down sharply, especially against the rising euro, in a highly volatile global marketplace.
Pound Sterling – UK Markets
This week, the pound has risen to the highest levels seen so far, this year. It’s been up at $1.28 this morning, with economists suggesting it might continue drifting up slightly. Put that into perspective, however, and the pound is still 13% weaker against the dollar before June’s referendum vote. Expect Sterling volatility due to looming political events like France’s first election round this Sunday. Sentiment for the pound is likely to keep strengthening on political news, as a more unified government will increase investor confidence. It will be interesting to hear Bank of England governor Mark Carney’s comments today, especially if he speaks about the challenge the UK’s future economy faces regarding the current account deficit. It may be very complicated for UK companies to clear deficit from their balance books after Brexit.
Yesterday, the Office for National Statistics (ONS) released their findings that Britain’s current account deficit was larger than the ONS had realised in 2012. Now it’s being revised higher for the years following, too. This current account deficit is the result of British companies paying more in interest to foreign holders of their corporate bonds. BoE’s Mark Carney has said that the UK needing billions of pounds in foreign finance to balance its books was akin to relying on the ‘kindness of strangers’.
In another report, the ONS said that British households had saved more than they had previously calculated, revising their figure up because they hadn’t factored in the increasing number of self-employed people. They acknowledged that the growing number of workers joining ‘the gig economy’ and other self-employed people pay themselves dividends from their own companies.
US Dollar – US Markets
The US dollar has slumped to a three-week low after being briefly supported by Fed Vice-chair Fischer saying he expects the US economy to expand and the Fed will remove accommodation and raise interest rates. This, he said, would benefit both the US and global economies. His optimistic words about a future prosperity were no match for concerns that Donald Trump isn’t able to wave any magic wand over the economy to keep it from slipping back into sluggish growth. Later, today’s jobless claims come out. If Friday’s Markit manufacturing and services PMIs come out lower than expected, they’ll add to the growing consensus that the US economy is slowing down.
In a Financial Times interview, Treasury secretary Steve Mnuchin explained that his plan for a ‘very significant’ tax reform by August will have to be delayed until next April. This is because Donald Trump’s decided he wants to try to get his healthcare plan passed first, because he’ll take funding from the current healthcare plan to pay for some of his stimulus plans. Mnuchin is scheduled to speak again today, and he might lift the dollar again, as he has done earlier.
The US Treasury’s recent currency report put Switzerland in the top six countries that are potentially manipulating their currencies. Switzerland says they aren’t since they meet only 2 of the 3 criteria. The US defines a currency manipulator as a country which engages in one-sided intervention in foreign exchange markets. The Swiss do this frequently when their safe-haven currency becomes too popular to help their exports. Secondly, they run a material current account surplus, but they don’t qualify since they don’t have a bilateral trade surplus with the US of at least $20 billion. In terms of their intervention in the Swiss franc, when the UK voted Brexit, one of the reasons why the pound fell so sharply is because investors leapt into buying Swiss francs. Switzerland’s central bank bought $66 billion worth of euros in 2016, another $20 billion after the June referendum vote.
Euro – European Markets
The euro is at a 3-week high today. This illustrates the current market volatility because the euro had performed so poorly for almost a month on concerns about the French elections. The euro’s weakness has been the cause of the Swiss franc’s strength, because the European Central Bank (ECB) has had to keep the Eurozone afloat with a long-running accommodative policy. In order to counter years of fragile economies, the ECB has maintained a quantitative easing (QE) programme. This year, the ECB is buying 60 billion euros of bonds each month, which help keep its value low. The euro still hasn’t recovered from its 3-week low earlier this month when Mario Draghi, the ECB’s head clarified that had been misinterpreted when his earlier comments hinted that the ECB considered easing QE measures. The euro will strengthen when QE is reduced or interest rates are raised.
The French election is increasingly harder to predict and it now looks more like a four-candidate battle, which is an unprecedented test for pollsters. Early this week, the front runners were Emmanuel Macron and Marine Le Pen but now they’re losing ground to the third and fourth runners up. With just days to go before Sunday’s first round of voting, Francois Fillon and Jean-Luc Melenchon are gathering votes from those who had long remained undecided.
Other Currencies – Highlights
The Indonesian rupiah weakened yesterday when Anies Baswedan won the Jakarta mayoral election with 58% of the vote, versus Basuki Tjanhaja Purnama, with 42 % of the votes. After a campaign featuring polarising mass rallies, with strong religious accusations including a charge of blasphemy for Purnama, Jakarta’s election was widely compared the Brexit and Trump’s election. Jakarta is Indonesia’s capital and commercial centre, and, as such, the country’s trends start there. Baswedan’s win over his more moderate competitor is a strong sign that Indonesia is likely to elect a populist leader like Trump in the 2019 elections.
Trump’s trade team have concluded their economic discussions with Japan yesterday and Jakarta is their next stop for early trade discussions. Vice-President Mike Pence wants to make certain that the US can still enjoy the reduced trade tariffs and entry in new markets the Trans-Pacific Trade Partnership (TTP) deal would have offered. But the US has rubbished the TTP in the hope that it can get better leverage when making bilateral deals, especially if it uses its argument that the trade partner is guilty of currency manipulation. Indonesia is on the US’s ‘hit list’ of 16 trade partners and it has a $13 billion trade surplus for supplying the US with commodities and manufactured goods. The trade ministers are expected to point to China as Asia’s largest currency manipulator, with a far larger trade balance, in the early talks.