Trump focuses on currency and golf
The week has started positively for the US dollar, continuing last week’s run of strength that saw it break a 6 week losing streak. In a meeting between President Trump and Japanese Prime Minister Shinzo Abe, currency devaluation is one of the few market moving issues that were discussed.
Trump weighed in in his inimitable style saying:
“As far as the currency devaluations, I’ve been complaining about that for a long time. And I believe that we will all eventually — and probably very much sooner than a lot of people understand or think — we will be all at a level playing field, because that’s the only way it’s fair. That’s the only way that you can fairly compete in trade and other things. And we will be on that field, and we will all be working very hard to do great for our country. But it has to be fair. And we will make it fair.”
Tax reform boosting dollar thoughts
A focus on the currency and tax reform is a net positive for the dollar as the campaign promises that got markets so excited back in November look like they closer to being enacted. It was also interesting to see that while the Donald Trump played golf with the Japanese PM, the negotiations were mainly handled by Vice President Pence and Deputy PM Aso. Trump is not being marginalised but the market will view deals that have fewer of his fingerprints on them as stronger than those that do.
The dollar may continue its run with the publication of the latest round of minutes from the Federal Reserve on Wednesday night. Any further signs of hawkishness there or within one of the nine speeches being made by Federal Reserve members this week will be seized upon as an indicator that the March FOMC decision still represents a possible ‘live’ meeting.
Brexit on hold for a week
Parliament is not ‘live’ this week, however, guaranteeing that the Brexit volume will be a lot lighter than usual for the coming few days. A parliamentary recess does delay the invocation of Article 50 but timelines and expectations in Westminster Village are still focusing on a meeting of EU leaders on March 9th as when Theresa May starts the stopwatch.
That being said, Chief Brexit negotiator Michel Barnier is apparently looking to demand a £48bln payment from Britain following talks in Brussels this week as part of the Article 50 process. These numbers have not been confirmed but Sir Ivan Rogers, former UK Ambassador to the EU, told a Commons Select Committee something similar last month.
While fresh Brexit news will be in the minority this week, the impacts of Brexit will be clear to see in the data. We have UK inflation tomorrow morning, unemployment and wage figures due on Wednesday and retail sales on Thursday. Apart from the wage figures all these releases are from January and could represent the real softening of the UK data picture into 2017.
The consensus expectation for inflation is a reading of 1.9% on the year. We think that this looks soft and that CPI will breach 2% in the UK for the first time since December 2013.
Le Pen and Greece hurt the euro
Elsewhere, the euro is on the back foot as political issues continue to swamp the currency. If it’s not gains for Le Pen in the polls, it is losses for Merkel in the polls and if it’s not those then there are fears over the Greek economy and its repayment of EUR26bln of debt due this year.
We maintain our near-term – end of Q1 – calls for GBPEUR to 1.20 and EURUSD down to parity.