Forex Weekly News for Week of February 27, 2017
Sterling Benefits from Political Calm
Trump reverts to what he knows best
President Trump continued in campaign mode this week telling those who would listen what he intends to do whilst in office. He seems to have forgotten that he was elected last November and now is the time for policies and action rather than continual rhetoric and bluster.
We all know now about the wall, currency manipulation and job creation but when are we going to; start building, charge China and put an economic plan in place?
The President, traditionally, doesn’t get involved in the currency but Trump being no respecter of tradition is not going to leave the fate of the dollar to his Treasury Secretary.
The minutes of the most recent meeting of the FOMC were released on this week. It was the first meeting since the recent rate hike and traders were interested to see how the prospect of further hikes was handled.
There was almost universal disappointment as the likelihood of an imminent hike was met by wholly unexpected prevarication as a wait and see policy was adopted. The FOMC is risking its credibility, built up over many years, by saying that it will wait and see one month’s data before deciding on a rate hike. Central banks look at trends and with most indicators trending higher such caution is without merit.
The Brexit bill is progressing through the upper house of the U.K. Parliament. Although a few obstacles may be placed in its path, the bill should pass reasonably unscathed. Markets are assuming that behind the scenes preparations are being made for the triggering of Article 50 of the Lisbon Treaty which will formally announce the U.K.’s intention to leave the E.U. This announcement is likely to be imminent with the Government having the stated desire to have triggered Article 50 by the end of March.
A by-election victory this by the ruling Conservative Party was the first gain over a main rival by a sitting Government in more than 50 years. This was not, however, a ringing endorsement of the Government or its policies it was more a reflection on the sorry state of opposition in the U.K. Socialism, as defined by the major opposition party, no longer garners anything like the support it did in the late sixties and early seventies. Its centrist move under Tony Blair has now been all but totally rolled back but they cannot get sufficient support by simply opposing all that the Government puts forward without policies of its own.
Political issues coming to a head in Europe.
This year was always going to be about politics in Europe; U.K., France, The Netherlands, Germany and Italy.
The very existence of the Euro is under threat in France should Marine le Pen win the May election. However unlikely that result seems now, the same could be true of both Brexit and Trump a similar time before the votes.
The shift in the political landscape in France is very well illustrated by a small mining town in Northern France. In past elections this had been a left wing bastion with the communist candidate always doing well in elections narrowly losing to a more mainstream socialist contender.
However in the latest opinion poll, there was 95% support for le Pen. The whole town has been devastated by the downturn in the French economy since the financial crisis and rising nationalism is driving working class votes towards right wing parties.
Ms Le Pen is well behind reform candidate Emmanuel Macron and since the fall from grace of his main centrist rival Francois Fillon, Macron is likely to be facing le Pen in the runoff on May 7th.
Economics still drives markets too!
In this week as it is sees the start of a new month , we have the release of economic activity indicators in the U.K., U.S and Eurozone. This data is fairly standardized across all major economies which makes it easier to make comparisons than other measures that are anything but standard.
Purchasing Managers Indices below 50 mean contraction in manufacturing and above 50 expansion. The size of deviation from that median indicates the level of confidence and activity in the relative economy.
These three economies have had readings around 50 for the past few months but as the effect of the 20% fall in sterling starts to take effect in input costs, the U.K. is the most under threat of a downside surprise.
The extremely volatile Durable Goods Orders data will be released in the U.S. on Monday. Since this report deals with “big ticket” items like planes and oil tankers, the ex-transportation figure is the one that traders focus in on. For example in December durable goods rose to +0.5% from a previous -1.9%, whereas the ex-transportation figure was unchanged at 0.5%. The longer term investment intentions of corporations are very well illustrated by this report.
Finally, both Donald Trump and Janet Yellen make major speeches this week. Trump to both Houses of the legislature and Yellen to business leaders. It is likely, given the recent past, that both will favour rhetoric over policy.