Good morning,
Dollar gaining but running out of steam
Dollar continued to press on yesterday in quiet trade with political weather systems picking up speed as we head into the end of the year. Some of that dollar demand may indeed be havening from ill political winds in Europe and the US but elements of USD strength from a potential hike in December cannot be forgotten.
The dollar strength, and weakness in emerging market currencies, has been enough to push the offshore Chinese yuan to its lowest level on record although commodity currencies are outperforming slightly courtesy of a pick-up in iron ore prices in China to the highest level in 2016. The devalued yuan and the higher ore prices are linked of course and hence why we are not seeing a dramatic rip higher in EUR or GBP vs the USD; there is little global pull through.
Belgium holds trade deal hostage
Instead of pulling through European politicians are pulling their hair out as the CETA deal between Canada and the EU continues to stall. A summit to announce the deal has been planned for Thursday but at the moment it’s looking like it’s all going to be a waste of a good buffet.
Wallonia, a region of Belgium that 3.5m people inhabit, have once again objected to provisions for farmers and legal protections for investors within the CETA deal. This is the 4th time that the Wallonia authorities have voted down the CETA measures and Paul Magnette, the Socialist leader of the region, knows that opposition to big business and overarching trade deals is a vote winner in European politics at the moment; it will take a lot of money and an even larger bending of principles to change his mind.
UK to focus on Belgian lessons
The obvious question therefore is; what does this mean for Brexit? Theresa May would likely say that it means nothing as the negotiations on Brexit have yet to begin but what it does show is that the EU may be too large to negotiate deals – any deal from the UK will have to progress through no fewer than 35 national and local parliaments with any one holding veto powers.
We have to believe that any deal between Europe and the UK would be a lot further ranging than a deal between Europe and Canada and therefore the potential sticking points are vast.
MPs on the European Scrutiny Committee are set to grill Liam Fox tomorrow on what could be the fall out for the UK’s negotiations and plans; we foresee a lot of shrugging and not much insight.
The Day Ahead
Similarly we do not expect much from today’s Mario Draghi speech at 16.30 BST but the topic is monetary policy and therefore there is an implied risk. He looked like a man that was fed up with the ECB last week, it will be interesting to see whether his views differ from that of the body that he represents but EURUSD does look eager for further lows but euro weakness may have to take a turn at the wheel.
The data calendar is still rather quiet today with the latest German IFO numbers and the US consumer confidence numbers. The trend of unease will continue.
Have a great day.