“Mutual exasperation” needs to be overcome

Since June when it broke significant resistance against the dollar, the Euro has been on a singular path. Versus the pound it has reached the high only seen during last year’s “flash crash” this decade, versus the greenback it has risen close to 1.2000 from 1.1280 in the same period.

Yesterday Brexit talks resumed and the distance between the two parties is as wide as ever. It is difficult to understand the U.K.’s negotiating position unless it is to slow the pace so much that a hard Brexit becomes inevitable. Gone are the days when Theresa May’s stance that no deal is better than a bad deal could be considered a viable proposition. Her election debacle saw to that.

However, Michel Barnier is clearly frustrated saying that UK “ambiguity” must be removed and progress on “separation” issues made before any talks on the future EU-UK relationship. The U.K. is accusing the EU of making unrealistic demands over the “bill for departure”. A further impasse is likely and without a breakthrough, the new December date for agreement over the three issues holding up the talks on the relationship after Brexit will be impossible to meet.

Draghi confirms Euro indifference

In a recent speech, Ardo Hansson, the Chairman of the Bank of Estonia and member of the ECB Council, commented that the ECB wasn’t concerned by the rise in the value of the Euro. This was largely seen as an hors’ d’oeuvre to the main course; confirmation of this fact from the President, Mario Draghi.

Draghi made two speeches last week, the first in Germany where he praised the research institute at which he was speaking for their outstanding analytical skills and the second at Jackson Hole Wyoming at the Central Bankers Symposium where he spoke about the need for caution over any suggested “rolling back of financial regulation”.

The one thing missing was any mention of the Euro and this was taken as an agreement with the sentiments expressed by Hansson and the common currency resumed its trajectory higher.

Draghi has been strident in his defence of a monetary policy that may suit some but not others although is considered fair for all. For example, a weak Euro was bringing concern to Germany as they felt they were importing inflation. The Italians and French favoured the weak currency as it aided their exports. Now the table are turned and the strong Euro favours the Germans although it may not be too long before they are complaining about the effect on their exports.

Such are the trials of the Central Bank!

Yellen’s hand to be forced?

There is a saying that it is an ill wind that blows nobody any good. The strongest of winds hit Texas over the weekend and may just blow the FOMC off course. The devastation that has been wrought by Hurricane Harvey on Texan oil production is yet to be fully quantified. If production is badly damaged the oil price will rise significantly and the Fed’s plans for withdrawal of stimulus and possibly a further rate hike this year will also be called into question.

At Jackson Hole, Yellen followed her ECB colleague by avoiding the subject of monetary policy and sticking to the script of the symposium.

As the global economy continues to recover, there are becoming more and more calls for the normalization of monetary policy. These have been met by various measures as G7 economies deviate ion the pace of their growth and fresh headwinds appear.

The FOMC has always been the most proactive of the Central Banks and true to form was the first to start to normalize policy which “squares the circle” as they were the first to introduce quantitative easing. The Canadian economy follows the U.S. closely which is hardly surprising given the nature of their relationship. The Bank of Canada raised rates at their last meeting on July 7th and the expectation is for more to come.

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