Good morning,
GBP: What is your custom?
The Brexit debate on the Customs union took some of the wind out of the pound’s sails yesterday but the major hit to sterling came courtesy of lower than expected borrowing numbers that showed businesses are still extremely uncertain about the investment atmosphere.
Jeremy Corbyn’s intervention on Labour’s desire for a customs union was more political news than economic news. It puts pressure on Theresa May’s speech on Friday but not on Brussels’ plans that will be released tomorrow. In the grand scheme of things however, it adds to the ‘trade limbo’ that the UK could easily find itself; which country is going to want to sign a trade deal with the UK if a Labour win in a general election means that that deal would lapse with the UK reinstalling a customs union with the European Union?
As noted by Sir Martin Donnelly, former permanent secretary at the Department for International Trade, on this morning’s Today programme leaving the single market and customs union is like “giving up a three course meal for the promise of a packet of crisps in the future”.
There is no sterling data today.
USD: Powell ready to howl
Jerome Powell will testify in front of Congress today in his first real official act as Fed Chair since taking over from Janet Yellen at the end of January. The testimony is ostensibly on monetary policy in the United States and therefore is a fairly wide ranging brief. We would expect that the new Fed Chair will continue to emphasise that economic activity is performing adequately, that inflation is coming higher but the most important phrasing will come if he weighs in on fiscal stimulus. We would expect that Powell will note that such fiscal stimulus as is planned from the Trump tax plan could drive a higher pace of interest rate hikes.
We do not expect such language to meaningfully impact the dollar today.
EUR: Who cares about Rome?
ECB President Draghi said on Monday that the central bank must remain persistent in providing stimulus to the Eurozone economy. We as market watchers were most focused on language however that detailed what the ECB expects on prices; Draghi noted that “headline inflation will resume its gradual upward adjustment, supported by our monetary policy measures. At the same time, uncertainties continue to prevail.”
The Italian election this Sunday is the risk that nobody wants to price. Hedging contracts to protect against falls in the euro are trading at less than half the levels that we saw in the lead-in to the Dutch and French elections last year. Parties within the Italian political diaspora have become less anti-EU than they were this time last year – amazing what a little bit of economic growth can do.
Our webinar on the election and the wider prospects for the euro is due tomorrow.
NZD: You get what you give
The Kiwi Finance Minister moved to explain the strong NZ dollar last night noting that a “strong New Zealand dollar reflects a strong economy”. Recent falls in business confidence were also explained away as being naturally part of the landscape when governments change hands and that the upcoming reform agenda from Jacinda Ardern’s government would be enough to swell confidence once again. NZD slipped a shade overnight but remains at decent levels against the USD.