Good morning.
Dollar rally takes a breather as market contemplates next steps
The post-election rally in the US dollar took a breather yesterday – after all, there’s only so much pricing in of higher infrastructure spending and inflation you can do when the President-elect is yet to appoint a cabinet or even a Treasury Secretary. As such, volatility has been drained from the market, allowing equity markets in Asia to make gains for the first time in four days this morning. Nonetheless, the bar has been set and it’s becoming clearer that Trump’s preferred policy mix will be one that favours the US dollar, helping lift US companies that are dollar earners, but making FX a greater problem for those who rely on exporting.
UK retailers and wholesalers absorb prices rises… for now
CPI inflation slowed in October despite economists’ calls for a faster pick-up in prices. The fall to 0.9% contrasts with the rise in factory-gate inflation, meaning prices are certainly rising – just not for the average consumer on the high street. As Jeremy pointed out yesterday, there’s little point in talking about inflation now as FX hedges and an unwillingness to raise prices ahead of Christmas will be keeping a lid on retailers. Nonetheless, as these hedges expire (on average, our corporate clients hedge for a period of approximately five months) retailers will cave in to the pressure, gradually feeding into prices, profitability and, eventually, headcounts.
Bank of England Governor Carney testified alongside some of his MPC in front of the Treasury Select Committee yesterday and held his ground relatively well. After coming under fire for his ultra-easy monetary policy in recent months, Carney’s rebuttal was clear: the Bank’s policy is a reaction to external conditions which, in turn, are a direct result of UK government’s management of finances, unemployment, the economy and regulation. Therefore, the detrimental effects of low rate policy are the fault of government, and not the Bank of England.
The pound now best performing currency in the G10 since US election
After underperforming against literally every free-floating currency in the world, the pound appears to have found a short-term bottom and has been the strongest currency in the G10 since the US Presidential election. While this rally in the pound is likely to be due to a shift in positioning and rejigging among speculators, UK data has so far been favourable which could protect sterling against losing any of its recent fervour. UK jobs numbers next on the block today at 9.30 GMT.
Have a great day.