Daily Market Brief 13 Aug 2018

All hail King Dollar!

August 13th: Highlights

  • Trump continues to use trade as a weapon
  • Brexit fears continue to drive Sterling lower
  • Euro falls on fears over banks Turkish exposure

Dollar index at 13-month high

Over the term of his Presidency, Donald Trump has threatened several countries with military action, he has used sanctions to try to bend countries to his will, and even met with leaders he had no chance of dealing with, but his most effective weapon has been tariffs on trade.

Trump has shown himself willing to provoke China by adding tariffs to a wide range of goods exported to the U.S by China, gambling on his belief that, in trade at least, China needs the U.S rather than vice versa. The jury is still out on that tactic.

There is a growing dispute with fellow NATO member Turkey over several issues the most pressing of which is the trial of an American Pastor charged with terrorism offences which he strongly denies. President Trump has doubled tariffs that were put in place in March on Turkish exports of metals into the U.S.

The original tariffs were a catalyst for a fall in several emerging market currencies. These latest tariffs threaten to cripple the Turkish economy as the currency has fallen by 40% in less than a month. The increased tariffs may be against WTO rules, but Turkey doesn’t have time to wait to find out.

The dollar rallied as emerging market currencies fell and the dollar index which measures the dollar’s performance versus major currencies rallied to a 13-month high of 96.45 before settling back a little to 96.32.

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Sterling crumbles despite no fresh Brexit factors

It would be a brave man who looked to buy Sterling in the current environment, but he may also be proven to be a wise man. Since Parliament rose on July 24th for its summer recess, the pound has lost close to 3.5% versus the dollar. Much of the reason for that fall has been two-fold; a surge in dollar strength and growing fears of a no deal Brexit. It reached a low on Friday of 1.2722 and has so far managed to hold its own as the market has reopened this morning.

President Trump changes direction over the dollar regularly, and his rhetoric over the weekend in which he said the “mighty dollar” was crushing the Turkish Lira could be as short-lived as his view on the success of his new relationship with North Korea. A correction for Sterling based purely on a reversal of dollar strength is eminently possible.

There is little doubt that a no deal Brexit, like an ill-wind, will do nobody any good and while the comments regarding the effect of a no-deal on the economy from BoE Governor Mark Carney should be taken seriously, he doesn’t, yet, see that as his base case.

As far as Brexiteer heavyweight UK Trade Minister Dr Liam Fox’s comments about a 60/40 chance of a hard Brexit are concerned, the lack of follow up they have received from fellow Brexiteers puts them in the box marked propaganda. There is far more likely to be an extension to the March 29 deadline than a no deal goodbye on that date.

The UK Parliament returns on September 4th and one of Theresa May’s first jobs will be to “steady the ship”. While she may not be believed, at least the other side of the no deal argument will have been put to rest.

There is a lot of discussion still to take place between London and Brussels before the outcome. Both sides posture and threaten but neither wants a hard Brexit to become a reality and there is still plenty of time for the pound to also recover a little poise.

Euro falls as bank’s Turkish exposure raises concerns

So as not to feel left out, the single currency also reached a level not seen in a year on Friday as it fell to a low of 1.1388 versus a rampant dollar. It has continued to weaken overnight as the Asian week began reaching 1.1365.

The euro has now fallen by 8.5% versus the dollar this year which must be ringing inflationary alarm bells at the Bundesbank if not at the ECB. ECB President Mario Draghi maintains his stoic acceptance of a weaker currency but if the pace of its fall this year accelerates then monetary policy will need to be reviewed.

The reason for the latest fall in the euro is rooted in the growing crisis in Turkey. There are concerns over Eurozone financial institutions exposure to Turkey, particularly Spanish, Italian and French banks.

Contagion is a word that hasn’t been used since the financial crisis but if the Turkish crisis spreads, Eurozone debt could be abandoned in favour of the U.S. with a consequent effect on the euro.

1.1000 remains the long-term target for the common currency versus the dollar and that level could be a line in the sand for the ECB who may be forced into action at least verbally at first.

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.”