It’s (almost) all about politics
In Spain, New Zealand, the United States, South Africa, Japan, and of course Britain, the main exchange rates drivers were political developments. Sterling came out of it pretty well, sharing second place with the euro behind the US dollar and strengthening by an average of 0.9% against the other dozen most actively-traded currencies. The biggest losers were the NZ dollar and the rand.
Tax and the Fed
Ahead of the weekend there were reports that the US senate had reached agreement on a budget that would give tax cuts to corporations and the wealthy. Although it is by no means a done deal, in the eyes of investors it is at least a step in the right direction towards the tax reform pledged by Donald Trump during his campaign. Because lower taxes are supposed to be positive for the economy, the prospect of them is helpful to the dollar.
Higher interest rates are also traditionally good for the dollar and investors have got the idea that a new chairperson at the Federal Reserve will make them more likely. The two front-runners to replace Janet Yellen next year (if indeed she is replaced – it is not a foregone conclusion) are known as relative hawks on monetary policy. Either of them would be more likely than Ms Yellen to hike rates. The dollar gained third of a cent against sterling and about half that against the euro.
Is the Iron Chancellor softening?
Strenuous diplomatic efforts by the British prime minster might have helped to achieve a softening of the hard-line Brexit negotiating stance in Berlin. Theresa May muddied the waters somewhat with her assertion that a transition period would only be possible if a deal had already been done with the EU but, until that point, investors had tended to look more positively on the post-Brexit outlook for Britain.
Any inclination of Angela Merkel to adopt a more conciliatory approach to Britain’s situation is bound to be complicated by her domestic situation. A month after the general election she has yet to cobble together a coalition. The presence of the nationalist AFD party in the Bundestag – and, indeed, objections from her own CDU party – makes it more difficult for her to pick her own path: for the time being at least she must appear to be all things to all people.
Investors continue to blow hot and cold about Britain’s ex-EU economic future. They have marked sterling down by an average of 10% from its pre-referendum levels so they are clearly not enthused by the prospect. Yet over the last three months the pound has led the field, strengthening by an average of 3.6%.
A month after the inconclusive New Zealand general election, parliament has thrown up a coalition government. That must be a good thing, mustn’t it?
It is so not the coalition government that investors had been expecting. New Zealand First, which holds nine of the 120 seats in the lower house, has sided with Labour and the Greens. Jacinda Ardern, the new prime minister, is an unknown quantity to investors so they have been treating the NZ dollar with caution. It lost 3% – five and a half cents – on the week to sterling.
Sarah, Senior Account Manager at Moneycorp
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