Trump picks a fight with Germany…
I hate to start today’s update with Brexit or Trump, but it is the latter’s administration that is driving some incredibly bizarre moves in the world’s reserve currency, the US dollar. Currency markets are regularly a farce but the Trump administration’s shoot-from-the-hip-any-trade-deficit-is-bad policy in the past few days have made it a nightmare.
Trump’s top trade adviser Peter Navarro told reporters that he believed that the euro was strategically undervalued and this was as a result of pressure from Germany to keep the currency weak to benefit its own exports. Yes, a new Deutschmark would be stronger than the current euro, but then again so would a separate London pound or a Californian dollar so maybe the EU should sign a trade deal with New York and California and let the Midwest hang?
…more for show than anything
Trump has made similar comments on China yet has not decided to label the country a currency manipulator as yet; something that he promised on the campaign that he would do on his first day in office.
The euro rallied on the comments on the belief that the Trump team, especially the Executive, wishes for a weaker USD but has since been tempered by the belief that Trump does not have the stomach for this fight. For a deeper and more engendered weakening of the dollar we think that the Administration would have to start undermining the Federal Reserve (a dangerous game to play) or allow taxes on inflows into the country to increase (something that Trump seems diametrically opposed to).
Fed to hold and keep things quiet
You’d have to be a monster dollar optimist to be looking for a rate rise at tonight’s Federal Reserve meeting, and with no press conference the chances of a market moving shift in the statement are low. That being said any hardening of the language around inflation could be seen to strengthen the greenback. We do not expect any commentary on Trump.
Euroboom?
The euro was helped higher by yesterday’s growth, unemployment and inflation numbers that all met or beat estimates. The Eurozone is not in a boom but a strengthening economy will be seen as a positive in currency markets and at the ballot box.
Timeline becoming clear in Brexit talks
Debate on Brexit in the Commons went late into the night but little news was forthcoming, save for a probable timeline of events. Next week will see more committee debate and voting that will last a few days, with final reading of the bill due next Thursday from whence it is turned over to the Lords. If the Lords attach amendments then it comes back to the Commons for further debate and if not, for voting and passage.
This would leave Theresa May able to trigger Article 50 in early March, with reports suggesting that she will do that on March 9th at a meeting of European leaders. The negotiations would start a few weeks after that.
Sterling slipped a little yesterday as consumer credit numbers showed shoppers brought in their horns in December following a splurge in October and November, damaging hopes that the bumper levels of private consumption will continue.
The Day Ahead
Elsewhere, it is the first of the month so we will be watching the latest manufacturing PMIs from around the world. Italy’s number is due at 08.45, France at 08.50, Germany at 08.55, and the Eurozone wide measure at 09.00 with the UK number at 09.30 and the US’s at 15.00.