Sterling
The Pound put in one of its strongest performances of the year yesterday as market volatility surrounding the surprise Donald Trump victory appeared to favour the UK currency.
Trump’s assertion that Britain would be at the front of the queue to agree a new trade deal with the US, because Britain is a ‘friend’, has been cited as one of the reasons for Sterling’s positive performance. However, analysts warn that Downing Street is unlikely to be given any favours by Trump, who has promised to ‘make America great again’ by imposing tariffs and halting the flow of globalisation.
It has also been noted that Trump’s plans to stimulate the US economy through massive spending increases, and therefore boost global inflation, has driven government bond yields higher, including UK Gilts. This has in turn led to a rise in demand for the Pound, which had previously decoupled from bond yields somewhat in the aftermath of the ‘Brexit’ vote.
Euro
The Pound to Euro exchange rate rallied over 150 pips yesterday to hit a new five-week high as fears of a rising tide of populism counted against the single currency.
Investors noted that ripples from the ‘Brexit’ vote, exacerbated by the Trump victory, could propel populist politicians into power in the currency bloc. Indeed, Italian Prime Minister Matteo Renzi faces a crucial referendum on constitutional reform next month, and has pledged to resign after if he loses. And French Presidential elections are due to take place in the Spring, in which far-right National Front candidate Marine Le Pen could be galvanised by the recent shift in global politics.
The Euro was hurt by fears of European populism, which some analysts fear could pose an existential threat to the Eurozone and the common currency.
US Dollar
Sterling strengthened by around 130 pips versus the US Dollar yesterday to strike a new one-month high.
However, the prospect of a rate hike from the Federal Reserve next month remains strong. The CME futures tool indicates a 76% chance of a 25 basis point rate rise in December and Trump’s hawkish outlook is likely to boost inflation and prompt further bouts of monetary tightening in the medium term.
US sentiment was also improved by news that Trump is unlikely to interfere with the Federal Reserve – his policies may persuade central bankers to vote for tighter policy but comments from his top adviser, David Malpass, indicate that he does not intend to enforce any radical changes at the bank:
‘The Fed is independent… I think people should move on from the Fed and talk more about the other policies that will change rather quickly’, he said.
Canadian Dollar
The Pound to Canadian Dollar exchange rate rose almost three cents to a new five-week high yesterday as markets continued to pummel the ‘Loonie’ due to the perceived negative impact of Donald Trump’s election victory. Trump’s protectionist policies could easily hurt the Canadian economy more than most due to the close trading relationship currently shared between the two nations. Consequently, there is now a higher chance of monetary loosening from the Bank of Candada.
Australian Dollar
Sterling jumped higher by around 250 pips yesterday, hitting a fresh monthly high in the process, as UK Gilt yields increased, therefore increasing the appeal of the British currency.
If Trump sticks to his guns and closes off trade links with the rest of the world, the risk-sensitive ‘Aussie’ could have further to fall.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate smashed its way to a monthly high after appreciating by around four cents yesterday. The mammoth gains followed the Trump election victory and the Reserve Bank of New Zealand’s decision to slash interest rates -25 basis points to 1.75% on Wednesday evening.
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