Volumes up, Volatility down
05th February: Highlights
- Sterling regains 1.30 level after upbeat data
- Dollar higher despite rising risk appetite
- Eurozone facing Brexit dilemma
Sterling facing a more volatile future
This year it is likely that the position will reverse somewhat as there is expected to be more speculation about the trade deal that the UK will reach with the EU rather than the binary Brexit or not decision which faced Parliament during most of last year.
Yesterday, economic data on the construction industry again proved the wisdom of the MPC subsequent to its decision to leave rates on hold following its meeting last week.
Construction activity rose to 48.4 in January from 44.4 in December.
Services output data will be released later this morning and is expected to be unchanged in January from December’s 52.9. Any significant deviation in either direction is likely to affect the direction of the currency.
Sterling reacted positively to yesterday’s data and managed to regain the 1.30 level which it was below at last evening’s close. It made a high of 1.3047, before drifting back to close at 1.3034
U.S. economy likely to lose $11 Billion in income from China
Over the past few days, China has accused the U.S. of deliberately inflaming tensions over the spread of the virus for its own reasons. This is a clear message that the Chinese will not provide any concession over trade in talks with the U.S. which are due to restart but will now doubtless be delayed.
The first direct cost associated with what is now approaching epidemic proportions is the release of data that shows the U.S. economy is likely to lose around $11 billion as Chinese tourists are unable to visit the country.
The U.S. Secretary of Commerce commented yesterday that the country is close to agreeing what penalties, mostly in the form of increased duties (or tariffs), it will charge to countries that artificially undervalue their currencies. China and Japan have been the traditional culprits but more recently Germany (outrageously) and Switzerland have come under the Treasury Department’s microscope.
As was mentioned recently, it will be interesting how Israel is treated since the BoI is perfectly open about what it is doing to keep the shekel under control (https://en.globes.co.il/en/article-boi-governor-to-continue-buying-foreign-currency-1001316710)
There seems to be a certain degree of conflict between the Dept’s of Commerce and Treasury.
Treasury recently removed China from its list of possible currency manipulators, while Commerce is still considering levying tariffs. If this happens, in the wake of the recent accusations over Coronavirus, it will be another irritant that may derail trade talks even if they could take place.
Yesterday, the dollar index continued to rise despite the apparent improvement in risk appetite that saw both the CHF and JPY weaken. It rose to a high of 98.01, closing at 97.95
Eurozone continues to lose ground to UK
The eurozone economy is not necessarily dead in the water, but it does need a major dose of stimulus. The most recent evidence of a 0.01% improvement in activity proves two things; 1) that the market is beginning to be grateful for any form of positivity and 2) it will be 22 months before the economy can be considered to be expanding again if the current rate continues. Remember the date, sometime around October or November next year.
On current evidence, The ECB is prepared to wait that long but it is doubtful that the markets will accept that time or the bank’s will be able to wait that long. Corporate lending is still falling as corporate clients find little need to invest in any major capital purchases or are unwilling to take the plunge until they see definite signs of large infrastructure projects being instigated by the individual states of the region.
The euro continues to be the dollar’s plaything behaving in a purely reactive manner. Yesterday, it reached a low of 1.1033, closing at 1.1044 despite the apparent improvement in risk appetite.
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.”