‘Trumpcare’ Fail Batters US Dollar
The pound has hit a 1-month high against the US dollar that’s been harmed by the Republican party’s failure to pass their own healthcare reform bill. Sterling will be super sensitive to data this week, just what you’d expect given that triggering Article 50 is an unprecedented historical event. After months of speculation, we’ll soon discover what happens to the pound’s value when Britain formally begins Brexit this Wednesday.
The US dollar lost most of its Trump related gains after the new US President failed to make good on his promise to repeal Obamacare. Given that his own party controls Congress, there’s a great deal of anxiety that his bills for tax reform and economy stimulus are jeopardised.
Pound Sterling – UK Markets
The pound was lifted last week after British consumers’ surprising retail spree in February. It was dampened by the Bank of England’s Gertjan Vlieghe’s statement that even if inflation rose to 3.5%, the bank might not raise interest rates. Until inflation is caused by economic growth, rather than Sterling weakness, the bank has taken its commitment to raise rates when inflation hits the 2% target off the table. Also, the bank hasn’t revised its inflation forecast up, over 2.75% in 2018 after it spiked unexpectedly to 2.3% in February.
Household borrowing jumped in February, according to the latest report by the British Bankers’ Association (BBA), which has calculated UK borrowed £13.4 billion which was an increase over January by 4.6%. Consumer credit is growing at a rate of 6.6%. This is worrisome given that annual pay growth, when inflation is factored in, dropped down to the lowest levels since October 2014.
Standing on the threshold of triggering Article 50, you can expect to hear plenty of prognostication about what’s in store for the pound on the other side of the door we’ll soon open. Here’s one: the pound could fall to a low of $1.06, according to Deutsche Bank currency analysts in a special report they prepared on Brexit. There’s long been predicted the pound would lose 10% of value immediately, but that’s being tempered by a balancing theory that, given the event is predicted, there will be very little change. Either way, the currency markets are in for a very interesting week.
US Dollar – US Markets
The US dollar was reduced to a 2-month low in early trade in Asia today as the global markets brace for greenback and market volatility. Those expecting Trump’s win represented a more ‘unified government’, where Republicans would easily pass his policies, are seeing the reality of his obstacles. He may still have an edge when he introduces his next piece of legislature this spring, since tax reform has broader party support than the healthcare bill did. US Treasury Secretary Steven Mnuchin expects Trump’s economic policies could increase the US’s current growth rate of 1.9% to as much as 3.5%. He’s confident that the US stock market will rise to even higher levels under Trump’s plans. However, he’d glibly said he was confident Trump’s Obamacare replacement bill would pass.
Last week’s durable goods orders rose by more than expected on the demand for commercial aircraft orders in February which boomed for the second month in a row. These larger sized orders carried the rest of the industry which wasn’t doing nearly so well. There’s recovering investment in business equipment, but a decrease in military orders, vehicles and automotive parts. US business growth decelerated in the first quarter of 2017, according to the Manufacturing and Services PMI. The economy is now struggling to continue its earlier momentum, with fewer new businesses being started and less hiring by established businesses. A future slowdown in the economy lies ahead as the baby boomer population begins reaching retirement age. American pensioners will be likely to spend the bulk of their budget on healthcare, and spend a third less on clothing, dining out and buying automobiles.
Euro – European Markets
Euro stayed strong after last week’s radiant series of reports. Germany’s consumer confidence, which was up, above expectation at 12.8 for March, clearly wasn’t misplaced. Germany’s Purchasing Managers Indexes, like France’s showed the strongest growth seen in the past 6 years. This morning’s German IFO business climate release shows business morale is at a 68-month high. The IFO economic research survey showed optimism that was higher than expected across manufacturing, retail and construction companies. More than 7,000 business participants gave a higher assessment and their firm’s projections for the next 6 months, sending a strong message that the European Union’s ‘engine’ is revving.
The European Union’s 60th anniversary celebration at the Rome Summit at the weekend gave European Commission President Jean-Claude Juncker an opportunity to promote his perspective on Brexit. He seemed nostalgic for the days when a British Prime minister would attend such an event, but firmly presented his ‘scientifically calculated’ €60 billion (£52 billion) Brexit bill. His re-iterating this as UK’s obligation is a clear sign the UK will be asked to pay before it can play at any trade negotiations with the Eurozone. Greece’s Prime Minister Alexis Tsipras seemed determined to spoil EU’s birthday party by speaking in Rome against the International Monetary Fund who wants Greece to make more reforms before agreeing the latest bailout payment. It’s 2015’s drama déjà vu as Greece’s finance minister broke off talks in Brussels, returning to Greece on Saturday.
Other Currencies – Highlights
Brazil’s real and the Mexican peso are a pair of emerging market currencies that fell sharply when Trump won the US election last November. The US dollar gained 6% against the Brazilian real on the news and Brazil’s central bank intervened by suspending currency swaps to contain the intense volatility. The real was one of the best performing emerging market currencies prior to Trump being elected and it remains to be seen whether the global emerging markets will suffer under the protectionist trade policies he’s promised. Now, Brazil’s got an export crisis of its own making as the country’s president describes the ongoing meat scandal as an ‘economic embarrassment’.
Mexico was the last in a long queue of countries banning Brazilian meat imports after the government’s investigations of 21 meat plants found expired and adulterated meat was being sold. For the world’s largest exporter of beef and chicken, the corruption and scandal has done serious damage to the industry’s image. Since the sector represents 15% of Brazil’s total exports, the effect on jobs and the economy were felt instantly. Meat exports fell by 99.9% (South Korea stayed on as a customer) in a single day, and where the day’s revenue had been USD$63 million, it evaporated to USD$74,000.