Sterling
Profit taking was the order of the day yesterday, as far as the Pound was concerned. Following last week’s unexpected surge, which came in reaction to Donald Trump’s shock election victory, most Sterling pairs came under selling pressure yesterday. However, GBP remains much stronger than it was this time last week.
UK Prime Minister Theresa May said that her government would be ‘unashamedly pro-business’ as it attempts to make a success of June’s ‘Brexit’ verdict. Today, though, a leaked memo suggesting the government still has no real plans regarding the UK’s exit from the EU has sent the Pound tumbling.
Euro
The Pound to Euro exchange rate remained close to seven-week highs yesterday as traders focussed their attention on the prospect of a break-up of the European project.
Speculators are scared that victories for the ‘Brexiteers’ and Trump this year could galvanise populist national political parties in the Eurozone – most notably in France, Italy, Holland and Germany. One hedge fund, Eclectica, has started betting on a breakup of the European Union, and claims it could deliver returns of 30-35%. The rise of far-right National Front candidate Marine Le Pen in France is seen as the biggest market risk of 2017 because her anti-EU policies threaten to take the Eurozone’s second-largest economy out of the currency bloc.
On the data front, today’s releases are expected to show that UK inflation ticked higher from 1.0% to 1.1% last month, while Eurozone GDP is likely to print at 0.3% for the third quarter.
US Dollar
‘Cable’ depreciated by around a cent yesterday, sliding from a five-week high as traders continued to bet that Trump’s debt-backed fiscal stimulus schemes would boost inflation and subsequently prompt a rapid rise in interest rates at the Federal Reserve. Trump’s plans to borrow in order to drive economic growth with large-scale infrastructure projects is seen as positive for the US economy and the ‘Greenback’ in the short term. However, some analysts warn that the fiscal stimulus, combined with planned cuts to business tax, could drive the US budget deficit as a percentage of GDP up from 80% to over 105% in the next 10 years.
Tomorrow’s US retail sales report is likely to show that sales volumes increased 0.6% in October, but a speech from Fed policymaker Eric Rosengren is hotting up to be the main event. So long as Rosengren does not talk down the prospects of a December rate hike then the US Dollar is liable to retain robust demand across the board.
Canadian Dollar
The Pound to Canadian Dollar exchange rate fell back by around -130 pips yesterday as markets locked in profit from Friday’s six-week high. Donald Trump’s unexpected election victory does not bode well for the Canadian Dollar because the Republican, with the backing of the Senate and the House of Representatives, plans to impose trade tariffs to protect US jobs. Any changes to the NAFTA (North American Free Trade Agreement) could seriously undermine confidence in the Canadian economy, which sends around 79% of its exports to the US. The ‘Loonie’ is also currently suffering from fears that OPEC may not be able to clinch a deal to curb oil output in order to drive crude prices higher; crude recently slumped to a three-month low on such concerns.
Australian Dollar
Sterling tumbled -130 pips on profit taking stances yesterday but the outlook for the Australian Dollar does not look great if Donald Trump does in fact pursue protectionist policies and decides to impose barriers to global trade. The high-beta ‘Aussie’ is susceptible to shifts in commodity prices and sentiment is likely to dampen if investors begin to foresee a trade tariff war erupting.
New Zealand Dollar
Despite the Christchurch earthquake over the weekend, the New Zealand Dollar managed to salvage a daily gain of around a cent against the Pound yesterday. However, with tsunami warnings still in place, and the potential for a near-term Reserve Bank of New Zealand rate cut to soothe global trade fears related to Trump’s protectionist policies, there is every chance that the ‘Kiwi’ Dollar could come under further selling pressure over the next few weeks.
Data Released
09.30 GBP Consumer Price Index (YoY) (OCT) 1.1%
10.00 EUR Eurozone Gross Domestic Product s.a. (YoY) (3Q P) 0.3%
12.30 USD Fed’s Rosengren Speaks to Portland, Maine Chamber of Commerce
13.30 USD Advance Retail Sales (OCT) 0.5%