Nightmare to sham
The currency markets were difficult to predict before the politics of the Western hemisphere changed last year with Brexit and Trump but now, they are not far from being a sham. Aside from reports that Donald Trump made a 3am call to his National Security Advisor to ask whether a strong or a weak dollar was better for America, these markets are proving to be a nightmare for anyone hanging out for even the slightest scintilla of stability.
A lot of that uncertainty is coming from the USD as traders unhappy with Donald Trump’s continual lack of detail on stimulus, tax and regulatory matters remain unwilling to hold on to the greenback. Anything that can be used to beat up on the dollar is being used at the moment as a further unwind of the moves in November and December of last year continues.
Brexit still on track
Similarly, the pickup in sterling in the past week as well as the policy vacuum in Washington DC has been enough to see some analysts upgrade their forecasts for gains in GBP/USD in the coming months; we remain reticent to upgrade our thoughts on the pound until the scope and task of the negotiations with the European Union become clearer.
Last night the government succeeded in getting its Brexit bill through the house unamended and it now travels to the Lords. The bill cannot be stopped here but can be delayed and, although the government does not have a majority in the upper house, expectations are that the proposed date of March 9th for a trigger of Article 50 are on track.
China waiting in the wings
The détente between China and the US is growing increasingly by the day. While President Trump is said to have thanked President Xi for this congratulations and wished him a Happy New Year of the Rooster, the upcoming battles on trade, currency, cybersecurity and regional influence are elephants in the room.
CNY has remained quiet through a tired Asian session with the rate of onshore and offshore yuan getting closer to parity having spent the past month or so with the offshore currency at a premium on liquidity concerns. China, and everyone in currency markets, are waiting in the wings for the Donald to make his first move.
The Day Ahead
Elsewhere the pressure of European politics on the single currency has continued with options markets continuing to show that the cost of hedging falls in the euro has increased as demand has too. Investors are nervous about further falls and a market dominated by snap opinion polls as we saw in the lead-in to Brexit and the US election seems just around the corner.
For now, the calendar is quiet today and we think currency markets may be too.