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The Week That Was And The Week That Might Be

A “special place in hell” is where European Council President Donald Tusk believes the Brexiteers who had no plan for Brexit, but promoted it anyway, should rest.

The Week That Was And The Week That Might Be

Tusk’s appetite for an confrontation is nicely summerised here, although it is yet to be seen whether his intentionally provocative and combative remarks will lead to an offer of fisticuffs at dawn from Boris.

To be fair, looking at the wealth and lifestyles of those leading the charge back in 2016, I always imagined them wanting to live for eternity somewhere exclusive and hot.

As we approach Valentine’s Day, Theresa and Jezz have exchanged loveless letters. Of Corbyn’s 5 requests, May replied that she’s willing to listen to ideas for the safe guarding of worker’s rights, the backstop and perhaps even find a few quid to help the poorer areas of the country who voted for Brexit (sharing isn’t always caring), but fundamentally disagrees with any suggestion of staying in the Customs Union. No cross-party agreement any time soon then. Excuse me whilst I fall off my chair.

The Bank of England voted unanimously to keep interest rates on hold and released an inflation report that gave little reasons to believe, with Brexit, they’ll be tightening that position. Carney reiterated that the uncertainty being suffered by businesses from the “fog” of Brexit, as March 29th draws ever-closer, is clearly short-term negative for the economy. Excuse me whilst I fall off my chair.

Sterling dropped to a one week low vs the euro and the breaching of 1.29 on Cable is the lowest GBPUSD has been since Jan 22nd.  Keep in mind Morgan Stanley recommended buying on 1.29 dips. So perhaps a couple of sessions of retracement back to 1.30.

Related:  UK CPI provides a brief respite for the Pound whilst US data stagnates

Already this week UK economic data has disappointed…unless you were short sterling that is. Manufacturing posted another horrendous m/m figure of -0.7%. That means a contraction of 1.9% in the last 3 months; the worst run in many a year. Production output slowed in Q4 by 1.1%; -0.4% m/m growth figure was the first negative since we started reporting monthly last June; Quarter-on-Quarter UK GDP missed estimates, growing at only 0.2%. UK business investment dropped 1.4% from last quarter, meaning the worst consecutive quarters since 2016. Inflation on Wednesday is expected to stall around (but not above) 2%.

I’d love to use a sinking ship analogy, but it’s unclear whether Transport Secretary Chris Grayling will, at the second attempt, give the ferry contracts to a company with any ships to sink.

For a full breakdown and overview of bleakness…enjoy

But the soap opera may be about to be commissioned another series. The PM stands accused of preventing Parliament from having another meaningful vote until March to leave the only plausible outcome (unless we truly do throw ourselves off the side of the ‘No Deal’ cliff) a vote to extend March 29th deadline so she’s got more time to negotiate with Brussels. We will find out more this Tuesday when May delivers a speech to Parliament on negotiation ‘progress’. on Wednesday in PMQs we’ll be reminded of just how divided Parliament is.

If so, expect sterling to be range-bound 1.13-1.16 for the next month vs. euro. Global risk appetite currently off makes me believe both currencies are potential prey to the safe-haven USD, JPY and CHF. Japan posting an expected 0.4% bounce in their GDP this quarter, after a very poor -6% in Q4 last year, will keep Yen a desirable safety net.

Related:  FX week ahead – key data from Eurozone, NZ UK and US

I now think the most likely Brexit scenario to be a deadline extension. To reflect this shift I have changed my 6 month predictions and reduced sterling gains. I’m still confident of a deal in the long term, hence being Bullish for sterling 12 month.

In the Eurozone, with Italy in recession, jobs data disappointing and Germany no longer looking like the manufacturing behemoth to right all economic wrongs, I’ve changed my longer-term stance. The possibility of a global recession would leave plenty of European sovereign debt in peril and my hunch is now for the euro to struggle vs. major pairs in the longer term. German and wider Eurozone Quarterly GDP will both need to see at least a 0.1% to avoid a euro sell. Germany’s -0.2% last was quarter mustn’t be replicated. If it is, then euro is going DOWN.

Carney speaks tomorrow on economic outlooks and trade tensions. You wouldn’t expect anything new, but a reiteration of UK Brexit business woes (GDP sadly today backs that up) and the knock-on effects of trade wars could see another pound dip and take the momentum out of any 1.29 dollar rally.

FED Chair Powell speaks tomorrow, and, like the UK, forecasters in the US will be watching retail figures closely in the second half of this week, hoping consumers have been spending and thus boosting confidence in the key parts of the economy.

Canada added 67,000 to its employment roster in January, mainly amongst 15 to 24 year olds and a good sign for the availability of jobs for new workers in the market. Year on year, total employment was up 327K (1.8%), with balanced growth in full and part time hiring. Total hours worked was up 1.2% as well.

Related:  US Employment Exceeds Expectations Boosting Chances of FED Rate Hike

However, none of the good news was enough to prevent a dip in the currency value, driven by the continuing risk to the global economy and future worry in US/Chinese demand for Canadian exports. The fundamental areas of growth and employment are currently solid in the Canadian economy, but last week reiterates the dollar lives and dies by factors outside of its control in the warehouses and factories of its trading partners. Bringing us to China’s monthly Trade balance, this is pencilled in for Thursday. The size of surplus is a crucial indicator of China’s manufacturing and exporter health. This determines the quality of raw materials the country needs for production, and is therefore important for the dollars of Canada, Australia and New Zealand. It was a tremendous figure of nearly $400billion last month, although is expected something closer to $250Bn this time around. The CAD will therefore likely be up or down depending on whether that estimate is a large miscalculation either way.

It’s a busy week for New Zealand, with The RBNZ releasing statements on its interest rate decisions (it will keep the base rate @ 1.75% this week) and Monetary Policy. Inflation is expected to remain 2% and Central bank of New Zealand Governor Adrin Orr,  just like his Australian counterpart, will want to warn growth slowdowns and trade risks, in the hope of talking his Kiwi currency down and cheaper. RBA Governor Lowe, as I suspected, last week did a very successful job of talking down future conditions for an RBA rate rise, with the USD/AUD rising back above 1.40 as a result. Well done that man.


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