01 October 2019: The end is Nigh!

The end is Nigh!

October 1st: Highlights

  • Johnson still believes a deal is possible
  • The dollar index continues to drive towards 100
  • German inflation and employment remain subdued

The final act in a long-running drama?

By the end of this month, many questions that have been considered for the past three years may be answered: Will the UK leave the EU? If it does, will it be with a comprehensive trade agreement? Will Boris Johnson still be Prime Minister? If not him then who? Will the date of the General Election be known?

Like the plot of a long-running soap opera, there will be many more twists and turns before Halloween.

The pound will be pulled in every direction like a leaf in an Autumnal wind as every possibility is considered and rejected.

As had already been reported, GDP contracted by 0.2% in Q2 which produced year on year growth of 1.3%. This is about as good as can have been hoped for given the turmoil that Brexit has wrought upon the economy.

While the Conservative Party Conference was in full election mode making spending promises which will most likely evaporate in the warmth of a Conservative majority, the opposition parties, collectively known as the “Rebel Alliance” plot the downfall of a Government which is ready and willing to surrender to an election.

All that remains of this act of the drama is for no-deal to be finally removed from the table. That is apparently going to be achieved by a vote of confidence in the Government followed by the installation of a “caretaker” Government. Whoever is given the ceremonial role of short-term Prime Minister will immediately ask for an extension to the Brexit deadline which while by no means certain to be granted, will allow for a General Election to be called.

Yesterday the pound was in a relatively narrow range versus the dollar as anticipation bubbles below the surface. It traded between 1.2347 and 1.2275, closing virtually unchanged on the day.

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Can anything stop the surging dollar?

The greenback’s almost inevitable march towards the 100 level continues unabated. In what could be considered a “perfect storm” of positive developments, the global economy, monetary policy and the woes of the Eurozone are conspiring to push the dollar index higher and as a consequence make American exports less competitive.

There is very little that can be done other than the old-fashioned ploy of intervention by the Central bank. While this was commonplace in the 1990s, it is almost considered “bad form” to artificially weaken a currency now although it would be the ultimate humiliation for President Trump who has constantly accused other nations of such tactics.

The Treasury Department run by staunch Trump ally Steve Mnuchin is powerless (unless he truly considers intervention) to halt the dollar’s advance. There is no single issue that is providing the wind beneath the dollar’s wings.

There have been rumours that the makeup of the dollar index may be changed to better reflect the global economy in the 21st century. The euro, JPY, and CAD are definite candidates to remain but there is a real possibility that the KRW (Korean Won) and CNY could replace the CHF and SEK. The jury remains out on Sterling’s position post-Brexit and there would be a concern that a currency almost entirely state managed as the CNY is could be part of the index. However, it would be odd if the currency of America’s largest trading partner didn’t make up part of the index.

Yesterday, the dollar continued to rally, primarily versus a weaker single currency (see below) The index reached a high of 99.46, closing at 99.40.

Draghi’s parting shot; a single budget

The outgoing ECB President, Mario Draghi gave what may be his last in-depth interview yesterday and hinted at several policy changes that could take place after his departure. These changes could give a boost to the economy and therefore the currency.

His most telling comment concerned the long-held expectation that the entire Eurozone could have a single fiscal policy with a budget that is agreed by every member of the euro. Were that the be even possible given the amount of vying for funds that would take place with accusations of favouritism the least of a Central Finance Ministry’s concerns, just how it would work in practice would be difficult to imagine. There would be spin-offs too, the most contentious would be how the entire population would come under a single tax regime, while social security would have to be centralized. There is then the issue of those inside the Eurozone and those who are EU members but do not belong to the single currency.

While these are logical steps given some of the clauses of the Lisbon Treaty, it would take an inordinate period for an agreement to be reached and given the parlous state of the economy, it is by no means certain that that time is available.

In the short term, Draghi backs plans for tax cuts and fiscal stimulus, especially in Germany. This should have the effect of driving growth in the Eurozone’s largest economy and create activity in the rest of the region.

Inflation data was released yesterday in several individual nations as a prelude to regionwide price data which will be released this morning. In Germany, inflation fell by 0.1% in August as it did in July. It was a similar story in other major economies with inflation falling across the board.

In Germany, the unemployment rate remains at 5% although the overall jobless figure fell.

The single currency continues to weaken as traders see little return on investment and activity slows. It reached a low of 1.0885, closing at 1.0900.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”