Trumponomics on Tap Today
Sterling suffered its steepest fall against the dollar in 3 weeks as the market was appalled by the spectre of a second Scottish independence referendum. We’ll waken Wednesday morning after Trump’s Tuesday night policy speech and discover whether the week’s most important event for the currency markets is good news for the pound.
The markets hope Trump strikes a presidential tone and that the former developer reveals his blueprints in depth this evening in his first formal address before Congress. The US dollar will be awaiting specifics regarding corporate tax cuts which, like his proposed border tax, will be hard to pass with the Republican party’s infamous parsimony. There’s just one question about Trump’s promise to super charge the economy that economists are ‘bigly’ curious about: who is the billionaire president planning to present the trillion-dollar bill to?
Pound Sterling – UK Markets
The pound has recovered only slightly, after slumping on the news of the Scottish independence referendum. It also absorbed the economic ramifications of immediately limiting the freedom of movement of EU citizens in the UK when Article 50 is triggered. And reports are surfacing that France, Germany and Italy will delay trade agreement talks until the UK agrees to pay a €60 billion ‘leavers fee’. Yesterday’s release of an EU survey of business confidence showed the UK is the second most pessimistic country regarding economic outlook, surpassed only by Greece. Concerns about Brexit risks are elevated by frequent warnings, including one today by the chief executive of the Financial Conduct Authority. He’s told the Treasury select committee that a sudden, hard EU exit threatens market stability. Also, inflation is making itself felt, according to GfK’s monthly consumer poll which dipped from -5 to -6 in January, mirroring a YouGov reading of 109.4 from 109.6.
The gig-economy is the fastest growing segment of self-employed people in the UK, according to industry group IPSE. Almost doubled since 2008, freelancers grew by 43% to 2 million workers in 2016, contributing £119 billion to the economy. Foreign exchange firm AFEX forecasts the pound will inch higher this week, possibly reaching 1.20 against the euro. That may come on euro weakness following today’s release of Sentix’s monthly ‘euro break up’ index which shows that in a poll of 1,000 investors, 1 in 4 expect at least one member state will exit the Eurozone in the year ahead. Lloyd’s Bank also expects the pound to regain strength against both the dollar and the euro.
US Dollar – US Markets
Today the dollar, like the currency markets worldwide, holds its breath ahead of President Trump’s critical speech later before a joint session of Congress. The global financial markets have had enough hyperbole and are anxious to hear Trump’s detailed policy plans, specifically how he plans to fund growing the US economy by 4% each year. If he delivers this, the Fed is more likely to raise rates, which will send the dollar soaring in Asian markets on the speech. There’s loads of data due out from the US today, with GDP being the priority. Analysts anticipate a quarterly increase from 1.9% to 2.1%, having grown by 1.6% for 2016. This underlines how lofty and potentially impossible Trump’s goal of 4% growth might be. He’s critical of December’s trade deficit, which will likely have widened to $66 from 65 billion, but critics warn that his protectionist trade barriers would harm, not help the economy.
Yesterday’s US Durable Goods Orders for January release was a bad start to a busy economic calendar; however, the dollar is expected to have a good week due to the gaggle of 11 Federal Reserve speakers, quietly vying to upstage Trump. The consensus that the Federal Reserve feels confident about a March interest rate hike, irrespective of Trump’s fiscal policy announcement, injects confidence into a nervous global market. The first set of durable goods figures under Trump’s presidency showed an unexpected drop from 0.5% in production to -0.2%. Pending home sales were down sharply to -2.8% for January from the anticipated rise of 0.8%, showing a contraction in demand for single-family homes. This was balanced by a rise of 0.4% for the year-on-year figure. Tomorrow’s key report featuring the state of US manufacturing is expected to be robust as will be consumer spending figures.
Euro – European Markets
Politics across Europe kept the euro from making any real gains as the dollar and pound stagnate. Dutch politics has become the bellwether for Europe, according to a recent Economist article, with populism predicted to win the 15 March parliamentary election. The Parliament in The Hague have voted to have the Council of State argue the pros and cons of Holland remaining with the single market currency. Deepening the odds of Nexit, the move was led by a lawmaker who criticises the European Central Bank’s low interest rate policy for negatively impacting pensioners.
Today’s France’s GDP figures are up to 1.2% for the year, from a last reading of 1.1%, whereas Sweden’s year-on-year GDP shrunk from 2.8% to 2.3%. Italy’s Consumer Price Indexes indicate inflation is rising faster than expected. Italian inflation clocked in at 1.8% in January, a rate which will boost the Eurozone’s total inflation rate.
This week’s Eurozone inflation data is the last report before Next Thursday’s European Central Bank (ECB) meets next Thursday. Inflation is probably going to hit 1.9%, which means ECB may be shedding their monthly bond buying by €60 billion as they alter quantative easing accordingly.
Other Currencies – Highlights
The New Zealand Dollar took advantage of Sterling’s Brexit jitters, yesterday, lifting it from a pattern that kept Kiwi contained for the past 2 weeks. It’s still in a slump since the Reserve Bank of New Zealand dismissed a rate hike in favour of keeping their easing bias, to the detriment of NZD. The release of New Zealand’s trade figures would ordinarily be the market’s focus this week, but a pair of global factors, Trump’s speech and Federal Reserve Chair Janet Yellen’s talk on Friday, will take precedent. New Zealand’s trade is dominated by dairy exports which accounted for 3.5% of New Zealand’s GDP or $7.8 billion. Dairy exports generated more than 1 in every 4 dollars earned by New Zealand. The nation’s 2nd largest export is meat, accounting for $5.92 billion of exports in 2016.
Geography challenges New Zealand’s reach as a global trade partner, making fellow antipodean Australia its largest bilateral trade partner. Economic and trading links are regulated by their shared ‘Closer Economic Relations’ (CER) agreement which also allows free movement and the right to work between the countries. China, New Zealand’s 2nd largest trading partner is steadily increasing its dairy imports, which is critical for kiwi and risky for both countries. Both Australia and New Zealand’s currencies are at the mercy of China’s economy which is increasingly reliant on producing more currency to fuel growth, risking a sudden crisis in China that would hit both trading partners the hardest.