Brexit fishing deal fury
19th January: Highlights
- Brexit not as smooth as has been mooted?
- Are we at the start of a long dollar rally?
- Lockdown extensions to lead to bankruptcy epidemic?
Sterling weakening versus the dollar, up versus euro
Yesterday saw a protest in the centre of London from Scottish fishermen whose trade has been seriously affected by delays caused by border checks. Prime minister Boris Johnson has pledged an interim support payment of £23 million to assist those hit hardest.
Numerous stories have emerged of cargoes spoiling in lorries delayed at the border by discrepancies in paperwork.
As the Pandemic continues to threaten the Health service, it seems that evidence is emerging to suggest that the nationwide lockdown is having the desired effect. The level of new infections is down by 25% in a week while the vaccination programme surges ahead. Hospital admissions and fatalities lag infections so a peak is still 7-10 days away.
The short-term effect of Brexit teething problems, and the Pandemic are well known but it will take some time before estimates emerge of the longer-term problems.
Airlines, the travel industry, pubs, restaurants, and other ancillary entertainment businesses are struggling to survive while there will be a knock on across just about every service driven business.
Industrial and manufacturing output which is not as significant in the UK as it is in some other developed nations is also going to suffer with disruptions to supply chains in what has become an extremely integrated market bringing delays to shipments and delivery of parts.
The Government is continuing to repeat its message regarding safety warnings, keen to guard against any complacency setting in. It is likely that any easing of restrictions will have to wait until mid-March as determination remains to stamp down on new infections.
Yesterday saw a quiet start to the week with the U.S. on holiday. The pound was marginally higher on the day in thin trade as dealers and investors turn their gaze on the U.S. and the inauguration of Joe Biden. Sterling traded between 1.3519 and 1.3606, closing at 1.3586.
Biden’s inauguration to bring positivity but concerns remain
Incoming President could scarcely be more different as a politician or human being than outgoing one-term President Donald Trump.
The timing of Trump’s impeachment trial is being discussed by the outgoing majority leader in the House of Representatives, Republican Mitch McConnel and incoming Democrat, Chuck Schumer.
Biden wants a day split in two where his nominees for various Cabinet posts to take place followed by the trial. That will take agreement from all sides with time running out.
There has been more cooperation from Republicans this time as the tide has turned against Trump in his own party and it seems his days as a Politician are coming to an end.
Tomorrow will see the confirmation hearing for former Fed Chairperson Janet Yellen who is the highest profile member of the Cabinet.
While it is obvious she has the necessary experience to be Treasury Secretary and her ability to work hand in hand with the current Fed Chairman Jerome Powell, it is her policy input that is most awaited. That is not an issue for Congress, and she is certain to be confirmed but she is an unknown quantity as far as ongoing stimulus packages are concerned.
There is a growing feeling that the dollar is setting a base for itself to begin a long grind higher in the coming months. While risk appetite is still the most potent driver for the greenback, economic activity, and the recovery from the Pandemic on a country-by-country basis will be closely watched.
As already mentioned, the U.S marked Martin Luther King Day yesterday and the financial markets were quiet. The dollar index climbed to a high of95.19 but prof-taking in thin markets saw it close marginally lower on the day at 90.76
Banks to see exponential losses from bankruptcies
Going into the first lockdowns close to a year ago, the economy was struggling and close to a recession. When the effect of the shutdown of many businesses is considered, the growing bad debt mountain that will hit banks’ balance sheets across the entire region will significantly subdue lending just as funding for the survival of those struggling businesses is most needed.
There is no question now that the region will face a double dip recession as lockdowns are extended across most of the region. In one unlikely country, Greece the lockdown has begun to be eased as infection rates have fallen. However, one of the main industries of Greece, tourism, will continue to be closed as rules regarding visitors from outside the country remain in place.
It is likely that the one country to avoid the recession will be Germany. It is estimated that the economy will grow by around 4.5% this year, although that number is very much a movable feast as the country is struggling to obtain and deliver sufficient quantities of the vaccine.
The German economy is expected to reach pre-Covid levels sometime during the first quarter of 2022 but as in the U.S. it is politics that is beginning to dominate with Angela Merkel set to step down as Chancellor having already divested her leadership of the senior member of the ruling coalition, the Christian Democratic Union.
There will be a vacuum created that will be felt across the entire region which will create an opportunity for Merkel’s friend and compatriot Ursula von der Leyen to step up to the benefit of the entire EU.
The euro remains pressured at higher levels with the state of the economy beginning to be questioned and affect the currency. Yesterday in thin conditions, it fell to a low of 1.2053, closing at 1.2076.
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.”