Good morning,

GBP: Local elections offering sterling hope

Sterling has had an interesting bank holiday weekend, setting off like a rocket ship on Friday afternoon before settling down yesterday and finding itself marginally higher this morning. If you’d had as busy a weekend as sterling then you might be getting to your desk a little short of sleep.

Friday’s move higher of over a per cent against the USD was mainly driven by the only thing that could get the pound to move that much: Brexit. With both the government and the Labour party losing sharply in Thursday’s local elections, parties that explicitly back an ‘exit from Brexit’ or at least a confirmatory referendum on the UK’s deal to leave the EU won out.

That swell of support for a softer Brexit, or even no Brexit at all, has given sterling a drive higher as has some language over the weekend that the government and Labour party could be close to an agreement on a customs union.

As long as the chatter around Brexit is one of a deal with Labour or another vote/revocation of Article 50 then the pound will get some support. There is one huge caveat to all of this which is that the newly-formed Brexit Party were not running candidates in the local elections but are set to dominate the European votes on May 23rd. It is these votes that could dominate the pound much more than the election of Lib Dem or Green councillors and prick any balloon of optimism.

Theresa May is also facing more calls for her resignation today and has been asked to set out a firm deadline for her succession.

USD: Trump lobs a grenade at China

The main news over the weekend has not been Brexit-related but a grenade from the White House on US/China trade. Late on Friday, Donald Trump announced that tariffs on Chinese goods entering the US could be hiked from 10% to 25% as soon as this Friday.

We think this to be nothing more than bluster; a negotiating tactic from someone looking to extract a few last concessions before the agreement of the deal. The move shocked markets because, rightly or wrongly, assets has been priced for the 100% passage of a deal soon. This note of jeopardy was not what anyone was really expecting.

The dollar moved higher and the Chinese yuan got thumped as investors injected this uncertainty into prices but we could easily see a strong recovery if markets realise that Trump is merely employing ‘The Art of the Deal’. The news that the Chinese trade delegation will still travel to Washington this week as planned is broadly supportive but we will be watching the Presidential Twitter feed closely.

AUD: No cut for now

The Reserve Bank of Australia declined to cut interest rates overnight but sounded dovish in doing so. The AUD rallied on the decision to hold the Official Cash Rate and the chatter will now turn back to the economic data, particularly unemployment data, that the RBA said would need to decrease in order for the economy to hit the Bank’s inflation targets.

A 25bps cut does little to an economy as flexible as that of Australia and so trimming slightly is neither here nor there. That being said, as long as the global pressures of a weaker China and antagonistic trade policy remain, investors will continue to bet on a move lower in Australian interest rates and a weaker AUD as a result.

Have a great day.