Ransquawk

Simply a by-product of dollar activity?

Does the euro have a life of its own any more or is it simply driven by the fact that it makes up more than half of the dollar index?

There has been every little reason for the fall in the common currency recently other than its reaction to a stronger dollar. It can be argued that the ECB has done a good job in maintaining stability by making perfectly clear to the market that interest rates and the high level of accommodation is are not going to change any time soon and that monetary policy is for the entire region.

But that then raises a question. What is the eurozone really made up of? Is it a potential industrial powerhouse as depicted by Germany and few other lesser economies or a collection of smaller weaker economies that are irretrievably linked to a partner they will never be able to emulate, even if they wanted to?

The answer it seems is to be found in the fact that every nation of the eurozone determines its own fiscal policy and that will need to be changed if the region is going to become a homogeneous bloc all pulling in the same direction.

It is clear that the whole experiment is “here to stay” but the appointment of a new ECB President, most likely Jens Weidmann, President of the Bundesbank, could herald further upheaval.

Try looking in the right direction

I find it difficult to understand how so many factors about the U.K. economy fascinate trader’s so much when there is only one driver to be considering. Brexit.

The rate hike smokescreen put up by the MPC recently was merely a ploy to push sterling a little higher as they had run out of monetary policy ideas to lower inflation. It was working too until the Governor got cold feet about the potential losses that could have been incurred by hedge funds had they been allowed to continue to buy Sterling, certain that there was rate hike coming.

Brexit, by any measure, will be a severe test of the capability of the MPC to fulfil its mandate.  No one believes that in the short term the UK economy can grow following Brexit and that was one reason for the cut in growth (and inflation) targets at last week’s MPC meeting.

For the foreseeable future and possibly even longer, Brexit will remain the only driver for the UK, economy, inflation, employment and clearly the currency.

Can it regain 1.4000? Not for some considerable time. It is basically between 1.3000 and 1.4000 but the skew is now heavily for a test of 1.3000 with few positive factors although the market may hope for some about-turn from Brexit hardliners that allows a soft Brexit to happen

Trump all out of magic tricks

No matter what has happened over the past few months, we are soon going to have to be concerned again about the fate of the U.S. economy.

Donald Trump has done all he can for now to divert attention by producing a series of foreign policy wins that have boosted risk appetite globally and therefore the dollar. Those days are coming to an end and the reality of inflation, growth and employment will return to provide drivers for the greenback.

The U.S. economy is not in bad shape, but neither is it thriving. Q1 growth was lower than it should be at these point in the cycle and inflation remains stubbornly low. Long term yields are proving some short-term support but that can only go on for so long.

The twin deficits are going to come back to bite the President particularly if he thinks that he can get America growing strongly by throwing more Federal money at infrastructure projects. Will the level of U.S. debt put off the Asian buyers? Can they be expected to continue to fund the U.S. with some large concessions?

Steve Mnuchin may get his wish for a weaker dollar, but Trump will continue to exert his considerable personality on foreign policy to “make America great again”.

Leave us a comment!

Ransquawk