04 Dec 2018: Backstop a “calculated risk”

Backstop a “calculated risk”

December 4th: Highlights

  • Parliament demands to see a legal basis for a backstop
  • Dollar awaits employment report and Fed decision
  • Weak Manufacturing output in Eurozone set to continue

Government’s “lawyer” back Brexit deal

The Attorney General, the Minister who provides opinion on the legality of Government actions, spoke in Parliament yesterday and labeled the Brexit backstop a “calculated risk”. He agreed that the UK could be permanently locked into the deal but said that the risks were both manageable and considered. He went on to say that it is not in the interests of either party to exercise the backstop.

MP’s from both sides continue to insist on seeing the legal basis upon which the Government is backing the plan as Mrs. May continues to affirm that publishing such information is “not in the public interest”.

The debate in Parliament is scheduled to continue for five days culminating in the vote next week on the Government’s plans. With more and more issues piling up, the entire legal argument is clouding what should be a relatively simple question being put to MP’s; “does the deal deliver on the referendum result?”.

The pound suffered yesterday against the single currency in particular, falling to its lowest level in over a month, reaching 1.1204 and breaching the 1.1200 level overnight. It held its own versus the dollar which was suffering a correction (see below). There is an air of acceptance hanging over the market as the Parliamentary vote looms.

Speculation is rife about what will happen following the vote. If the Government is heavily defeated, what will Mrs. May do? She was quoted yesterday as saying she fully expects to still have a job in two week’s time. Since there is likely to be a vote of confidence in the Government following a defeat, the question is what will her title be? Ex-Prime Minister or ex-Conservative leader, or both?

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Dollar weaker as risk appetite improves

The dollar index fell yesterday as the market saw the nascent agreement on a trade ceasefire between Presidents Trump and Xi as positive for the global economy and higher risk assets.

Although the suspension in additional tariffs due to be enforced by the U.S from January 1st is temporary, it at least shows a side to President Trump that few believed existed. His show of good faith will allow trade delegations to meet and work on a more permanent solution.

The dollar index fell to 96.71. It recovered a little, closing at 96.96 but has resumed its fall overnight as Asian stock markets continue to rally.

The “main event” for the dollar this week will be Friday’s release of the employment report for November. There is a certain amount of concern that the headline NFP data will lower than the market’s expectation of an additional 200k new jobs created together with a possible downward revision to October’s +250k.

Increases in average earnings are expected to remain above 3% which will interest the FOMC which meets on December 19th. It is still widely expected that they will hike interest rates to 2.50%. However, it will be the tone of Chairman Powell’s statement that brings volatility to the markets, as he may indicate that this will be the last hike before Q2’19.

Eurozone economy continues to drag its feet

Eurozone-wide data for manufacturing activity was released yesterday and confirmed what the markets already knew. That the economy is just about crawling along above the line between expansion and contraction. Activity was at 51.8 in November. That was slightly better than October which was 51.5. Below the 50 level is the point at which activity is contracting so, while the data is just about positive it provides little comfort to the market which sees the ECB as powerless to support what is clearly an ailing economy.

Individual data for Germany, France, and Italy, the three largest economies showed that it is not the smaller, weaker economies where the issues lie but with the larger supposedly stronger ones. Each of those economies faces domestic issues but, surprisingly it is Italy’s radical plans and expansive budget that are seen as likely to drag its economy higher (if it can survive higher levels of debt going forward) as Government spending drives infrastructure projects and benefit increases.

The riots which took place in France at the weekend which were supposedly over fuel taxes have been labeled as either right-wing inspired or really a protest against globalization depending on who you listen to.

No matter the reason, President Macron is under siege from what is the worst crisis of his term in office. His decisive majority from eighteen months ago has been slowly dwindling but it is unclear if there has been a lurch to the right in support of Marine Le Pen who Macron beat in the election in May 2017.

The single currency had a volatile day yesterday, closing at 1.1345. It has rallied further overnight, so far reaching a high of 1.1388.

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.”