It’s Not Just the Economy, Stupid

Currency drivers come in all shapes and sizes.

Global risk aversion, Political events, and Black Swans, market drivers are all around us. As a market analyst and political commentator, I find myself tuned to the next event in the most unlikely of circumstances. Watching the news concerning Hurricane Harvey, I immediately considered the effect on petrol prices down the line and how that may add to the inflation scenario in the U.K.

The interaction of the “globalized” economy means that “it’s an ill wind which blows nobody any good. There are obvious examples like the effect on Japan of the North Korean situation but they have an unlikely effect. The JPY has appreciated as Japanese repatriate overseas assets buying Yen in the process.

Australia is dominated in almost every way by China. They have become the supplier of industrial growth in the Chinese economy. To paraphrase, “when China sneezes, Australia catches a cold”.  

Dollar falls as rate hike expectations lowered.

Lael Brainard is a permanent member of the FOMC. She retains her seat as the Presidents of the Regional Feds rotate around her and Janet Yellen. Even Mrs Yellen could serve less time than Brainard. So, when she talks, despite her dovish demeanour, markets tend to take notice. Yesterday, she commented that the inflation outlook was “well-short” of target and this should slow down the rate of increases in interest rates. While this isn’t the final nail in the 2017 rate rise coffin, it is a serious injury.

Friday’s employment report was poor in comparison to recent data and there was a substantial downwards revision to July’s headline. Despite this, traders hung on to the surprise upward revision of Q2 GDP to maintain their hopes for a hike.

The outlook for the dollar is mixed with, as mentioned above, several drivers of its fate. Hurricane Harvey will bring a slight fall in GDP and should Irma following close behind bring further destruction to Southern States, Federal assistance could be substantial.

The dollar is now trading firmly below the 110 level versus the JPY as the North Korean situation continues to drive risk version. Sterling even appreciated against the greenback as Parliament returned from its summer recess.

Davis Optimistic, but may be “whistling in the dark”

The return of the U.K. Parliament from its summer recess provided Brexit minister David Davis with the opportunity, which it is doubtful he relished, to update Members of Parliament on the state of Brexit negotiations. Opposition MP’s already programmed to deride any optimism decried his speech as “the plaintive cries of a drowning man”

Davis called the assertion from Michel Barnier that little progress has been made incorrect and called up the EU negotiating team to be more flexible and pragmatic. Sterling rallied against a common currency that is performing an extremely slow and considered correction, falling almost apologetically, to 0.9130.

Tomorrow's ECB policy meeting is unlikely to herald any change to monetary policy as the cautious approach of Mario Draghi ensures that the tapering of the Asset Purchase Scheme is deferred for another month.