Sabres rattled in U.K. and U.S. but can they deliver?
The market witnessed a bit of good, old fashioned sabre rattling from America and Britain. President Trump on the eve of his first overseas visit challenged China to support the U.S. over North Korea. He went on to say that should that support be lacking, the U.S. was more than capable of dealing with the threat alone.
In the U.K., ex-government ministers were at pains to stress that Gibraltar is and will remain British. Any mention that “The Rock” will become a bargaining chip over Brexit were quickly quashed. Lord Howard, a former Conservative party leader (how did that work out for you?), called upon the government to “invoke the spirit of the Falklands” to inspire resistance to any Spanish claim.
Trump’s remarks had more effect than Howard's leading to a bout of risk aversion where the dollar fell by almost 1% against the JPY. It reached a low of 110.37 before recovering to 110.50. The Bank of Japan, in its quarterly “Tankan” briefing expects the dollar to average 108.50 over the course of the next financial year.
Brexit “pot” slowly simmering
In the absence of any other Brexit news or rumour, the pound fell against the dollar. It bounced of support at 1.2420 but has, so far, been unable to regain the 1.2500 level.
The huge rise in Foreign Direct Investment last year cut the U.K.’s current account deficit in half, bringing relief to a market which was showing concern over government borrowing. The investment bank Goldman Sachs warned that investors saw the pound as cheap, adding value to investments but that it still saw a fall for sterling in the coming months.
The vast array of forecasts for the pound has produced some interesting “outliers”. Barclays sees the pound recovering to 1.3500 vs. a weaker dollar. This view is shared by Investec, whereas, HSBC and Deutsche Bank see a fall to 1.0400.
This follows the adage if you are going to be wrong you may as well be spectacularly wrong. If economists can back up their targets traders will accept views. In any case, they can always have another go!
Purchasing Managers Indexes prove patchy global growth
Yesterday’s release of Purchasing Managers Indexes of Manufacturing in the U.S., U.K., and the Eurozone were far from uniform. In the U.S, the index was a little lower than both the previous month and market expectation. In the U.K., it was lower than last month but significantly lower than expectation. However, in the Eurozone it was unchanged and in line with expectation. Unemployment in the Eurozone remains stubbornly above 9.5% and withe producer prices also rising (by considerably more than expectation), there is still the threat of future inflation. Last week’s benign Eurozone inflation data may have simply been an anomaly since producer prices have consistently been rising.
Australian Rate Hike still unnecessary
The Reserve bank of Australia met overnight and left the key interest rate unchanged. RBA Governor Philip Lowe had already indicated that rates had reached a bottom. The Australian economy is growing on the back of high commodity prices and a record trade surplus driven by demand from China.
The South African rand had been performing adequately during Q1 2017, posting gains in January and February following on from December last year. That has now totally reversed and the uptrend which started in March 2016 has come to a juddering halt following the downgrade of the country’s credit rating to junk status. The negative outlook remains following President Zuma’s dismissal of the Finance Minister last week.