Brexit fears begin to hit home

The pound fell overnight to new low not seen since April 2017 as financial markets expressed concerns over the prospects for global growth in 2019. It subsequently recovered, reaching 1.2545 although its direction remains linked to concerns that the UK is now heading down the path to a No Deal Brexit.

While Parliament has been on its Christmas recess despite Opposition Leader, Jeremy Corbyn, making a demand that MP’s return early to vote on the Prime Minister’s draft Brexit agreement, traders have had time to absorb the possibilities of what no deal will actually mean. They have been able to sort the “wheat from the chaff” of what the real risks are compared to the scaremongering that has taken place.

The verdict on what is likely to happen after March 29th is nothing if not a leap into the unknown, but the most worrying part is that the Government appears incapable or unwilling to face up to the potential issues and that is what is going, in the main, to drive the currency lower.

The departure of the UK from the single market and customs union will mean additional costs for British business as a bare minimum. There will be no time to adopt a “suck it and see” attitude as the economy will be facing the issues from day one.

Yesterday also saw the release of the Purchasing Managers Index of activity (PMI) for December, which rose to 54.2 well above the market’s expectations and stronger than the November release which was revised up from 53.1 to 53.6.

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Eurozone PMI’s tumbling towards recession

Individual Eurozone members’ PMI’s were released yesterday too and confirmed that it is going to be a difficult enough winter for the region without Brexit to “look forward to” in the Spring.

France and Italy continue to contract, Spain is only just expanding while Germany appears unable to buck the trend of lower production although its November data was revised slightly higher.

Overall Eurozone activity is just about showing expansion with the composite PMI at 51.4 from an upwardly revised 51.8 in November.

The euro faces further uncertainty falling to 1.1325 and closing at 1.1345. While the single currency remains the “alter ego” to the dollar’s gyrations, making up 57.6% of the index, it will suffer from counter-intuitive movements, but overall, the trend continues for it to suffer further falls. It is probable that the ECB has a “line in the sand”, a point at which the benefits of a weaker currency to economic activity become outweighed by the risk of inflation.

It would be my assumption that that level is close to 1.1000 versus the dollar although just what the Central Bank could do in such circumstances is hard to imagine. A rate hike would be out of the question since the economy is faltering.

When ECB President Mario Draghi first announced the withdrawal of the Asset Purchase Scheme, he commented that he wouldn’t hesitate to re-introduce it should the circumstances demand. That may be being looked at as a possible response to falling economic activity.

Dollar rebounds on safe-haven buying

The dollar index was the beneficiary of considerable safe-haven buying yesterday reaching a high of 96.96 before closing at 96.78. It is odd to report that a potential global economic crisis which is rooted in U.S. activity is leading the greenback higher.

That is the reality of the dollar’s status as a reserve currency despite facing domestic concerns about the continued tightening of monetary policy and a slowing economy at home.

An overnight fall in the dollar index back to 96.49 has been precipitated by a rally for the JPY which saw the opposite of a flash crash overnight rising to 104.76 versus the dollar before falling to its current level (0615GMT) of 106.88, still a 2.16% rise on the day.

The dollar was hit by a press release from Apple which commented that it sees slower sales in its latest quarter due to slowing iPhone sales, particularly in China.

Today sees the release of Institute of Sales Managers (ISM) data for the U.S., which follows closely on yesterdays Markit PMI release. This essentially shows the same data but Markit uses consistent values across all economies which makes comparison easier.

ISM has always been the more eagerly awaited indicator for the U.S. and for December, it is expected to show 57.9 which is healthy enough, except when compared to November’s release which was at 59.3. This reflects continued concerns over a slowdown in U.S. manufacturing activity.