29 November 2019: Currency markets crave certainty

Currency markets crave certainty

29th November: Highlights

  • Sterling shy of 1.30 despite YouGov poll
  • Dollar flat in slow Thanksgiving market
  • German surplus a negative for Eurozone economy

Under two weeks to go until decision day

Foreign exchange traders look at Sterling in the context of Brexit with no other driver in mind. Therefore, the recent YouGov survey which predicted a considerable Conservative majority is music to their ears. They get a degree of the certainty that they crave, but they also demonstrated that their confidence levels are low, and they do not want to get carried away (again).

Strip away the glare of the UK’s departure from the EU and what does the UK economy amount to? Does economic performance outweigh Brexit uncertainty? Would Sterling be closer to 1.50 or 1.10 versus the dollar were Brexit to have never become a “thing”?

We will never know but don’t be fooled by the fall in Sterling just after the referendum., It was overvalued at that time and the economy was weakening in any event, certainly relative to the dollar.

The next two weeks will be uncertain in the extreme with socialist newspapers trying to balance capitalist opinion polls and failing. The pound will react to that uncertainty by “retreating back within its shell”. It is fairly obvious that is the pound couldn’t crack 1.30 when the most positive Brexit news in quite a while broke, there is little hope of it happening before the result of the election is declared.

Yesterday, the pound reached a high of 1.2952, closing at 1.2911. Versus the euro, it continues to flirt with 1.1750 yesterday reaching 1.1738 and closing at 1.1731 having rallied from an opening level of 1.1668.

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Dollar drifts in aimless trade

Thanksgiving is the fourth quietest day in the markets after Christmas Day, Boxing Day and New Year’s Day.

Traders in New York and other American Cities are mostly too interested in the struggle to get back to their families to even notice what the markets are doing. In fact, the day tends to end as far as the market is concerned around 1pm London time when liquidity dries up completely.

Following Wednesday’s glut of data, the markets are relatively positive towards the dollar. The two negative issues on the horizon revolve around Trump’s continuing Impeachment Hearings and the ongoing trade talks between Washington and Beijing.

The hearings arrive in Congress next week and the President has been invited to attend. Since he has tried to avoid acknowledging the legitimacy of the hearings, it is doubtful he will choose to suddenly choose to do anything other than try to ridicule anyone attending in whatever capacity.

The current positivity around the U.S. economy, culminating in an upwards revision of Q3 GDP has been nicely topped off by Fed Chairman Jerome Powell, who agreed in a recent forum that America’s “glass is more than half full.

Early expectations for next week’s employment report are looking at a substantial improvement on the October report. Around 180k new jobs are anticipated to have been created versus the 128k last month.

The dollar index remains range bound despite the recent improvement in sentiment. It is rumoured that President Trump is gaining the upper hand in trade talks since China’s economy is suffering and growth is struggling.

Part of the reason for this is likely to be the tariffs that have been put on Chinese exports to the U.S. The reciprocal retaliation of Beijing has not had the same effect on Washington, so Trump may be looking at fresh demands or more tariffs. Nothing is going to be enacted before year end, but it should be borne in mind as an influence over risk appetite.

The index reached a high of 98.40 yesterday, closing at 98.30

Germany bullying the rest of the EU

Germany is an economic powerhouse that is going through a tough time.

What can they do to improve sentiment both within and outside its borders? One thing it could try is “playing nicely” with other Eurozone members.

Germany exports a lot of “things”. From BMW’s and Mercedes cars to Bosch domestic appliances to parts for other businesses supply chains.

The thing is, all those exports bring in huge volumes of cash, but Germany imports nowhere near as much as they export and that leads to a current account surplus.

Germans are loath to import what they consider to be inferior goods simply to be considered “good Europeans” and so the surplus builds up, which sucks in greater demand for its products.

As a member of the EU, Germany is not being a good European but it is in a difficult situation. German banks are retrenching behind the domestic border with the once globally dominant Deutsche Bank closing several trading floors and shrinking its product base making it more suited to a more demanding time.

Meanwhile the euro suffers as activity shrinks.

The new ECB President was hardly veiled in her comments last week calling for creation of greater demand from within the region as a defence against any significant downturn in global demand.

While supporting climate change action, the Bundesbank and German Finance Ministry do not see including it as a basic part of monetary policy as being any way to fight the issue. It is likely that von der Leyen and Lagarde (who disagree) on one side will be confronted by Scheuble and Weidmann on the other.

With Chancellor Merkel likely to be the referee for any confrontation, Ms Lagarde will feel the “odd one out” since she will be the only non-German trying to be not only a good European but a good global citizen as well.

The single currency remains in its current funk, trading around 1.10 versus the dollar. Yesterday, it reached 1.1019, closing at 1.1000

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.”