Sterling
UK data showed that the British trade deficit widened by more-than-anticipated in September, from -£11.1 billion to -£12.7 billion, but the ecostat was largely overshadowed by the surprise US election result.
The Pound rallied against most of the majors as financial investors pulled out of risk assets in reaction to Republican Donald Trump’s victory. UK Prime Minister Theresa May said that Britain would retain its ‘special relationship’ with the US.
Euro
The Pound to Euro exchange rate jumped by around 150 pips to a new monthly high yesterday.
Demand for the single currency was damaged by comments from European Central Bank policymaker Ewald Nowotny, suggesting that prolonged volatility could prompt the ECB to loosen policy further. ‘We are definitely prepared to intervene in an emergency’, said Nowotny, hinting that any plans to row back on stimulus may not come to pass anytime soon.
Next month the central bank is expected to announce an extension of its QE programme, which is currently due to expire in March 2017. There had been talk of tapering the scheme, but talk of tapering is, itself, likely to be tapered following the Trump victory and its ensuing uncertainty.
US Dollar
After all the talk of the US Dollar weakening on a Trump victory, it turned out that GBP/USD remained fairly flat following the shock election result.
Sterling initially rallied versus the ‘Greenback’, however, the long term implications of Trump’s Presidency do not appear to bode ill for the world’s premier reserve currency and ‘Cable’ quickly gave back its gains. Trump’s protectionist plans to impose trade tariffs on imports are likely to put upward pressure on domestic wages and boost consumer prices. And it is this uptick in inflation expectations that sent investors piling into safe haven US Treasuries, thus sending the US Dollar higher.
Markets were also calmed by Trump’s relaxed acceptance speech, which some hoped would prove the blueprint for future addresses. It had been feared that his outlandish approach to some areas of politics would spook financial markets and trigger mass global selloffs.
It had also been feared that market volatility would persuade the Federal Reserve to hold off raising interest rates in December. But, with volatility sticking to manageable levels, the CME futures tool now predicts an 81% chance of higher rates next month, which is also bolstering the appeal of the US Dollar.
Canadian Dollar
As one of America’s closest trade partners, Canada is particularly vulnerable to Trump’s protectionist policies, which explains why GBP/CAD was able to strengthen by around 250 pips yesterday. As it becomes clearer just how fast and how far the new President is willing to go in terms of disincentivising foreign trade, we could see the Pound claw back more of its ‘Brexit’ related losses versus the Canadian Dollar.
Australian Dollar
Sterling leaped higher by around 250 pips against the risk-sensitive Australian Dollar yesterday as flights to safety characterised trade in the Asia-Pacific region. The ‘Aussie’ could continue to come under pressure if the Reserve Bank of Australia alters its rate outlook in reaction to the result of the US Presidential election.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate also rallied by around 250 pips yesterday, helped by the Reserve Bank of New Zealand’s decision to slash rates -25 basis points from 2.00% to 1.75%. RBNZ Governor Graeme Wheeler said that the move was designed to get inflation back up towards target, however, he also mentioned that the Trump victory had affirmed the bank’s decision. The Trump element could have implications for future decisions, as central bank policymakers weigh up the implications of the shock result.
Data Released
13:30 USD Initial Jobless Claims (NOV 5) Medium 260k
19:00 USD Monthly Budget Statement (OCT) Medium -$78.5b