09 March 2020: Serious differences but deal possible

Serious differences but deal possible

09th March: Highlights

  • Brexit deal hopes buoy Sterling
  • Yield concerns trump stunning employment data
  • Monitoring looks like; too little too late

Barnier remains upbeat

The effects of Coronavirus on the UK economy are one of two great imponderables as the talks between the UK and EU over the post-December relationship get under way. In much the same vein as what was happening a year ago over the original Withdrawal Agreement, the market is reacting as if every action and every comment is the final word. There is still a long way to go in the negotiations but last week, at least, there was some positive news.

It appears that Chief EU Negotiator Michel Barnier still believes a deal is possible this year. Of course, Boris Johnson is certain a deal can be done this year as he has both the will and the power to ensure that if there is no agreement, the UK will be leaving on December 31st.

Small nuggets of information are slowly coming from the talks. The UK will leave the European Air Safety Agency following its departure from the EU. Even those with no view on this subject have been campaigning! Pro-remainers are saying that the UK won’t have access to one of the most sophisticated investigatory bodies in this field, while Brexiteers say that most of the investigators are British in any case.

It remains to be seen just how many more cans of worms will be opened but it will be trade and mutual access to each other financial services markets that will provide the most interest.

The economy is in an odd state of abeyance as everyone speculates over the effect of Coronavirus. There is little doubt that the hit will be serious but devastating? It’s too early to say.

This is the view of the Bank of England which is keeping its powder dry until it can be a little more certain. It is hard to see this as a virtue while the U.S. remains well ahead of the curve, yet we criticise the Eurozone for fiddling while Rome burns.

There is clearly no economic strategy that will be correct in these circumstances, but if the BoE is prepared to act rapidly should the situation require, the currency should not suffer too badly.

Last week, the pound was mixed although it ended the week strongly. It traded between 1.2740 and 1.3049, closing at 1.3033.

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Economic uncertainty spreading as fast as Coronavirus

The dollar’s strength so far this year has been built on a solid economy and a Central Bank that is prepared to act in order to ensure that growth remains constant no matter what is thrown at it.

There seems to be some argument in the financial markets about how serious the outbreak of Coronavirus is, the measures that are being taken and the veracity of the details being released by the Administration.

This uncertainty is leading traders offload long dollar positions that have been building for some time in expectation of the dollar index reaching and exceeding the 100 level.

Yes, the Fed cut rates by 50bp and despite the move being welcomed as timely and showing a degree of gumption,but the fall in yield on Government Securities has hit the dollar hard.

The rather sketchy information regarding the outbreak has been exacerbated by the performance of the Vice-President who was put in charge by President Trump.

Mike Pence clearly wants to appear as Presidential as his boss, but not only does he not exude his boss’s confidence, he seems too often to be poorly briefed coming across much like a Local Councillor visiting the scene of a car crash rather than the Deputy Commander in Chief.

Be that as it may, the fact is that the U.S. is expecting to be in an epidemic as cases grow. The Pacific North-West appears to be most badly hit but the volume of cases can only grow and become spread more evenly.

On Friday, the February employment report was issued and showed an increase of +273k new jobs being created, as well as significant revisions for both January and December. The rise in hourly earnings fell back to 3% from 3.1% in January which will have pleased the Fed as it continues to contemplate even more accommodative monetary policy.

The dollar remained rather surprisingly under pressure. The market appeared to feel that the size of the February number was irrelevant in the face of what is coming, and it prefers to wait and see what the March data brings.

The dollar index was under pressure all last week, it fell to a low of 95.71, and closed at 96.03

Fiscal coordination barely a consideration

It is one thing to admit privately that the tools in your toolkit are not fit for purpose but to publicly accept that there is little that can be done appears to be defeatist in the extreme.

The current crisis engulfing the Eurozone is very difficult for individual nations to counter alone.

Coronavirus is becoming a significant divisive force in the region, although there is agreement about one thing: indecision.

First, EU Policy Makers decided there was nothing they could do, this was followed by the G7 industrial nations who agreed. Then ECB President Christine Lagarde joined the chorus by commenting that she and her colleagues at the Central Bank are monitoring events closely.

There has been no mention of a joint fiscal cooperation which is the bare minimum that can be expected when monetary policy is so constrained, but no, it is still under consideration.

This lethargy or complacency doesn’t bode well for the future of the region.

In 2008 when the financial crisis hit, Greece was left to its own devices having to put in place some excessive measures at the behest of Germany and to a certain extent France.

Now, as Greece faces an invasion of Migrants through Turkey and its border is overrun, those same German and French Governments prefer not to get involved, not acting in solidarity with a member of the EU in its time of need. This is simply a further demonstration of the regions loose configuration when it suits it.

The euro has been the unlikely or unwarranted gainer in the markets since Coronavirus first hit. You can almost hear the anticipation ringing around the financial markets as traders hover over the sell button, ready to act just as soon as they feel safe to do so.

Last week the single currency reached a high pf 1.1354, closing at 1.1306.These levels were last seen in early July last year and are solely due to the weakness of the dollar and the euro’s part in the basket that makes up the dollar index.

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.”