The chief economist of Commerzbank, J\u00f6rg Kr\u00e4mer, has published a paper which, among other things, plays down the traditional assumption that uncertainty upsets financial markets. He says “the threshold for a shock triggered by the prospect of uncertainty is very high”. The referendum vote to leave the European Union certainly reached that high threshold: sterling’s subsequent trashing was fast and ugly.<\/p>\n
However, the uncertainty surrounding the final nature of Britain’s relationship with Europe is well below the threshold. Nobody knows how the country’s post-Brexit relationship with Europe will pan out but it began to look a week ago as though investors had tired of worrying about it. With the shock threshold beyond reach, at least for the time being, the tendency is for them to ignore the incessant barrage of speeches and comments and red lines, and to sit back and wait for something new to turn up.<\/p>\n
Very little has, so investors are treating the pound as they would any other currency. The only Brexit-related reaction came when one of David Davis’s sidekicks, Robin Walker, told the Institute of Directors that “I want to stress that we are very close to a [transition] deal”. Sterling perked up following his comment, sufficiently to leave the pound unchanged on the week, on average, against the other dozen most actively-traded currencies.
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Whatever their concerns about the US administration or the UK government, investors are broadly relaxed about life at the moment. The global economy is still growing at a respectable pace, nothing nasty has happened with Brexit, the Trump trade war appears to have been averted and it looks as though peace could break out in the Korean peninsula.<\/p>\n
The effect of that relaxation has been a migration away from the safe-haven Japanese yen and Swiss franc towards the supposedly more risky commodity-related currencies. Over seven days the Australian dollar has strengthened by 2% against the yen.<\/p>\n
Sterling added around half a US cent, half a euro cent and one and a half Swiss cents during the week. It lost a cent and a half each to the Australian and NZ dollars and a cent and a quarter to the Canadian dollar.
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