Brexit still a major Factor
5th July: Highlights
- Nissan bring UK a Brexit confirmation
- NFP reaction illustrates Market’s Fed reliance
- Italy benefits from online sales (and Draghi factor)
FT reports 30% of UK exporters report fall in sales to EU
The relief for the economy will be tempered somewhat by the fact that the effect that Brexit has had so far will be exposed.
While the Prophets of Doom who predicted shortages of everything from medicines to vegetables were clearly wide of the mark, there has been a significant drop in the volume of goods moving both ways across the English Channel.
According to a recent Financial Times report, almost a third of businesses that traded with Europe have seen a drop-off in activity while 17% have decided to stop, some temporarily or for good.
The headline grabbing story concerning the sale of British sausages to Northern Ireland is now well known, but this slightly offbeat tale masks the real difficulties that are being faced by several sectors of the economy.
Boris Johnson has shown himself to be a Prime Minister who looks at the big picture, leaving the details to his minions. Happy to celebrate successes like the news that Nissan is going to expand production in the UK, he ignores issues facing fishermen who are now unable to make a living.
Nissan have been something of a bellwether for Brexit, as workers in the northeast of the country where their plant is mainly situated voted resoundingly to leave. Now they are joined in expanding production by Vauxhall Opel which is also reportedly planning an expansion.
While the Pandemic has been an unmitigated disaster for the country, it has served to mask several mistakes made by the Government in other areas. With that mask now about to be disregarded, Johnson will be forced to face up to smoothing the path into Europe for British business.
Last week, the pound was pressured by a strengthening dollar. It fell to a low of 1.3731, closing at 1.3831. It is unlikely to show a lasting recovery until the Bank of England’s plans for tapering support for the economy become clear.
NFP is positive, but how long can it last?
In the end, the employment report beat expectations by some distance, but the dollar appeared to run out of steam and the market, having bought the rumour decided to sell the fact.
From an upwardly revised May figure of 583k and an expectation of 700k new jobs, the actual number of new jobs created came in at +850k.
It is well known that the earlier in the month the first Friday falls, the less reliable the data is, and that may have also had a negative effect on the market’s reaction.
Predictably, hospitality and leisure saw the biggest gains as the economy continued to open up.
President Biden chose to believe that the numbers were as positive as the headline showed. He commented that in the recovery, rather than seeing workers competing for scarce jobs as would be the normal effect of the emergence from a recession, employers are competing for workers who have become a scarce commodity.
With the unemployment rate still at 5.9%, there is something at work which doesn’t add up. In 2019, the average unemployment rate was 3.5%, so workers shouldn’t be that scarce.
It seems that the answer to this conundrum lies in the fact that people are leaving their jobs in droves. It could simply be Pandemic burn out, whether workers have decided to enjoy the rest of the summer before returning, or it could be a nascent systemic change that is happening to the jobs market. It will need several more releases of NFP data to decide.
This week, another indicator of the Feds plans on tapering will be revealed. The minutes of the latest FOMC meeting will be published. While in the current environment, the minutes could be considered old news, they will be relevant to see how the different members are feeling about activity in their own regions.
That will take place on Wednesday, and until then the dollar is likely to follow the same pattern as last week. Strength until the release, then a period of indecision.
Last week, the index rose to a high of 92.74, just shy of resistance at 92.80. It closed at 92.24.
Lagarde sees fragility as a temporary issue
She was critical of England for allowing such large numbers of supporters into stadiums to watch the games. Sour grapes?
She was, however, daily supportive of allowing Brits who have been double vaccinated to travel freely around the region. This should provide a boost to those countries who rely on tourism as a significant part of the economy.
Christine Lagarde is stuck in the middle of a certain amount of conflict regarding when the Central bank will begin to taper its support. Jens Weidman, the Bundesbank President, repeated his belief that the inflation genie has escaped the bottle and will need immediate coaxing to return.
Italian Prime Minister Mario Draghi countered by saying that inflation is not that high. He will have been looking at historical data, while Weidman was referring to the past couple of years or so.
Data for the Italian economy released last week showed that the Italian economy is not suffering as much as had been expected.
Prior to the Pandemic, Italy had one of the lowest take-ups of online shopping in the EU. It has been transformed out of necessity to have the largest growth in that sector.
While that is clearly built on the needs, rather than desire, of the consumer, the country is joining the online age, and it will see long-term benefits.
One other positive for the country is the popularity of Mario Draghi as Prime Minister. Italians finally feel represented at the top table after years of squabbling coalitions. A clear path back to relative prosperity is being mapped out.
The euro suffered in the early part of the week as the dollar prospered. It fell to a low of 1.1807 but rallied to close at 1.1866. That pattern may be repeated this week.
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.”