Will Sterling Defy Article 50 Expectation?
The pound continues sliding from Friday’s 2-week high against the dollar, due to speculation about a second Scottish independence referendum. Defying expectation that the pound will sharply fall in March when Article 50 is triggered, Morgan Stanley forecasts Sterling strengthening, ending 2018 at $1.45.
The US dollar deflated last week as the thrill for ‘Trumpflation trade’ wears thin. Trump’s statement that he’d release his ‘phenomenal’ tax plan in a few weeks crashed down to reality when Treasury Secretary Mnuchin set the date at August. We might see the dollar drop further after President Trump addresses a joint session of Congress, tomorrow, especially if he ‘jawbones it’, suggesting he prefers a weaker currency.
Pound Sterling – UK Markets
The pound has a poor start to the week on speculation that Scotland is planning an independent referendum in March when Article 50 is triggered. Brexit will be the week’s focus , although the bill isn’t expected to run into delays at the House of Lords. It’s now assumed the UK will trigger Article 50 on schedule, at the EU Summit in Malta on 9-10 March. Friday’s release of a 12-month high mortgage approvals for house purchases indicate that historically low interest rates drove up home sales, although the figures are down from those of a year ago. January was 2.5% higher than December, but 2.5% lower than January 2015. Homeowners took the opportunity to re-mortgage at 16% higher volumes than last January, considerably above the monthly average of 25,987.
Much of the last 2 weeks of data suggest that the UK’s growth was largely fed by consumer debt. The surge in spending followed by a sudden collapse can be explained by consumers borrowing to make expensive purchases before the anticipated inflation drove prices up. A TUC report found that UK wages fell 1% a year between 2008 and 2015, due to the impact of inflation. This indicates that consumers will pull their horns in as wages continue to stall and prices rise, ending the growth that kept the UK economy insulated from Brexit’s impact. Add to that impact will be the ‘EU divorce bill’ which Austrian Chancellor Christian Kern last week calculated to be €60 billion. Softening the punitive rhetoric, a leading German banking executive, said the City’s role as the financial services ’gateway’ was at risk of being undermined, but noted it made no sense to ‘penalise the UK’ for voting to Brexit.
US Dollar – US Markets
Today’s main event on the global economic calendar is the US Durable Goods Orders for January which offer a first glimpse to see if last this year’s investment momentum has continued. December’s orders had advanced by more than forecast, indicating that businesses were preparing for stronger economic growth. December’s 63.9% drop in orders for military aircraft will soon be reversed. The likely headline in Trump’s speech tomorrow will be his plan to increase military spending which he plans to fund with cuts to environmental and state department program cuts.
Last week’s US home sales reports show a solid pace home sales which will soon stall due to historically low available properties and rising costs of borrowing.
Republican speaker of the House, Paul Ryan, toured the US-Mexican border on horseback as part of his plan to promote and increasingly unpopular Border Adjusted Corporate Tax (BAT). Federal Reserve Chair Janet Yellen’s among those who disagree that the tax would raise the US dollar’s value and thus offset the higher costs of imported goods. Once considered the cornerstone of Trump’s ‘phenomenal’ tax plan, BAT baffles because unless the dollar strengthens by 20%, Americans will pay the additional tax. And, should the dollar so dramatically rise, US exports will suffer.
Morgan Stanley investment bank recently released their Global Currency Forecasts. They predict the US dollar will be kept in check by US Federal Reserve caution that will delay rate hikes until late this year when an aggressive hike will pull the dollar up where it expects it to remain through to 2018. It predicts that political pressure will continue to erode the euro’s strength for the coming 2 years.
Euro – European Markets
The first key event for the euro is President Trump’s Congressional address tomorrow, especially if he gives further details to plans for a Border Adjusted Corporate Tax. Any penalising imports tax would be felt keenly by Germany and also, to a lesser degree by France, Italy and the UK. Just released, February’s Consumer and Industrial Confidence for the Eurozone came in with respectable strength. The Business Climate came in much higher than anticipated, which was the highlight of a nice start to the week. Wednesday German unemployment is in focus, Thursday’s the busiest day with Eurozone unemployment, followed by retail sales assessments on Friday.
On Friday, French consumer confidence remained at its highest level in more than 9 years in February for the second month in a row. Buyers were unperturbed by the upcoming presidential election, indicating their personal financial situation was positive, and they were only slightly pessimistic about the future.
Lender Commerzbank reckons German house prices are inflated by 10%, due to prices rising by 4.5% every year for the past 3 years. This bubble has sprung up because low interest rates make pension saving plans inadequate, and homes have become an alternate old age saving option. The longer the European Central Bank(ECB)maintains the low interest rates, the larger this property bubble grows. The ECB is unlikely to change their interest rate policy this year, so the housing bubble will make more of an impact when it pops in future.
Other Currencies – Highlights
Canada’s release of year-on-year Consumer Price Index last Friday showed Canadian inflation growing at the gradual pace that the Bank of Canada (BoC) will be happy with, rising from 1.5% to the anticipated 1.6%. BoC is expected to keep rates unchanged at 0.50% on 1 March. As with Mexico, Canada has its fingers crossed that Trump’s Border Adjusted Corporate Tax (BAT) fails to pass legislation in August. BAT’s current incarnation is a plan to impose a 20% levy on imports which would reduce demand for Canadian exports, driving the Canadian dollar down. Trump has hinted he might exempt oil, Canada’s largest export to the US. BAT might be merged with a stimulus program called ‘The Better Way Bill’, which BAT would fund. This poses a duel edged sword because the US stimulus is a boon to the $545 billion in US and Canadian trade a year.
Canadian Prime Minister Justin Trudeau was elected on his promise to revive the sluggish economy with economic stimulus plans, much like those Trump supporters anticipate. Last March, he pledged to spend $60billion on new infrastructure over a decade to counteract the rise to 7.3 % in unemployment caused, in part, by a fall in oil prices. The program plans to create about 100,000 jobs over 2 years. This week Canada’s Month-end flows and GDP release aren’t expected to dampen appetite for the loonie, which is still rising against the pound and US dollar.