The hot topics of the week in financial markets were, surprise surprise, Brexit and the American elections. Both were surrounded by acrimony, outrage and accusation and both had a noticeable impact on their respective currencies even though neither had actually taken place yet.
Hotmailgate and the FBI
The FBI director, James Comey, stumbled into the election campaign at the end of October when he reopened an investigation into Hillary Clinton’s use of unapproved email channels. The democrats were thrown off balance, allowing the republicans’ Donald Trump to edge ahead in a Washington Post opinion poll. Investors went into a flat spin, offloading equities and “risky” currencies and stocking up with gold and safe-haven yen and Swiss francs. The Mexican peso was hardest hit, falling sharply as investors tried to imagine what colour Mr Trump’s Big Beautiful Wall might be painted.
Then, last weekend, the FBI decided that Ms Clinton had done no wrong and would not be charged after all. When markets opened in the Far East on Monday the dollar gapped higher, together with shares and risky currencies. The yen slumped and the peso recovered its lost ground.
The lesson from all of this, if there really is one, is that investors feel happier at the prospect of more-of-the-same from the slightly left-of-centre Ms Clinton than they do with the risk of protectionism and barrier-building proposed by Mr Trump.
Parliamentary sovereignty and the High Court
During the EU referendum campaign much was made of the need to restore the sovereignty of parliament. There was thus more than a little unease on the Brexit benches when the High Court did precisely that, ruling that the prime minister could not initiate the Article 50 procedure for leaving the EU without parliamentary approval. The tabloids were generally horrified but FX investors delighted. In their opinion parliamentary scrutiny could result in some sort of Goldilocks Brexit, neither too hard nor too soft.
Helped by a doubling of the Bank of England’s growth projections sterling had its best day in months, strengthening across the board. On the week the pound is an average of 0.7% firmer against the other dozen most actively-traded currencies, losing out only to the NZ dollar and – just – to the Swiss franc.
The good news
From the point of view of investors and the pound it is better that parliament has a say in Brexit than if the process were to be carried out in secret by a Downing Street cabal. The result might not in the end be any different but at least it may be seen as a more transparent and democratic process.
The bad news
If parliamentary scrutiny means interminable debates and amendments the road to Article 50 could stretch a lot further ahead than the current end-of-March deadline. That would mean more of the uncertainty that has cost sterling so dear in the last four and a half months.
In the context of the above there are, at the time of writing, two known unknowns: the name of the 45th US president and the result of the UK government’s appeal against the High Court’s ruling on Article 50. If things go according to investors’ expectations the outlook will not look too different in seven days’ time. However, a president-elect Trump could really stir the hornets’ nest.
Sarah, Senior Account Manager at Moneycorp
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