It is instructive to look at the three destinations chosen by the outgoing US president for his farewell tour. Lima, Peru, was understandable enough: Barack Obama went there for the APEC summit meeting. But his first stop had been in Athens, where he called upon creditors (i.e. Germany) to write off some of Greece’s overwhelming debt. The following day he visited the German chancellor with whom, presumably, he discussed the same subject. Washington evidently sees a need for action on debt relief for Greece even if European leaders do not.
Investors see no great urgency for a solution to Greece’s perma-crisis but that does not make them totally relaxed about Euroland. Once again this week they heard the European Central Bank president pleading with the politicians to lend him a hand because monetary policy, however relaxed, cannot on its own cure the euro zone’s economic ills. There is also ongoing concern that next month’s Italian referendum and April’s French presidential election could bring out the protest vote, putting the single currency in jeopardy. So the euro did not have a great week. It lost more than one US cent and fell by a cent and a half against sterling. The euro was unchanged against the Swiss franc.
Although the pound lost out to the South African rand and the Canadian dollar it strengthened against the other major currencies, adding three and a half Japanese yen and edging ahead by a quarter of a US cent. The UK economic data did their bit, with unemployment falling to 4.8% and retail sales surging ahead in October. On Monday the pound inexplicably jumped a cent higher in a moment. There was no effort by the market to correct the move, suggesting that investors did not disagree with the pound being marked up.
After four months of bombardment the sensation is that sterling has been punished enough for the Brexit referendum. Although there is no assumption that it has turned upwards investors seem content to sit back for a while and see what happens when the Article 50 trigger is actually pulled.
The good news
For the most part, president-elect Trump has toned down the rhetoric he employed during the election campaign. Investors see his proposals for tax cuts and public spending as being positive for the economy, inflation, interest rates and the dollar. The US currency could not quite keep pace with sterling but it comfortably beat the euro, the yen and the Swiss franc.
The bad news
Mr Trump’s announcement that he will renounce the TPP trade agreement is more symbolic than dramatic: the agreement has not yet come into force so nothing will change. However, his apparent desire to tear up all such agreements is worrying not only for the United States but for the global economy as a whole. Right now investors are focusing more on what they imagine his domestic economic policy to be – tax cuts and spending. That would change if Mr Trump were really to start pulling down the shutters on international trade.
Sarah, Senior Account Manager at Moneycorp
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