Opportunity to reflect on Q2 drivers
The timing of the Easter holiday to coincide with the end of Q1 has provided a little breathing space to the market allowing readers to set their sights on Q2 aspirations.
Sterling facing a more difficult Q2
Of the major currencies, Sterling is the most likely to have its drivers if not its course mapped out for it. There are expectations of a rise in interest rates next month although data releases will need to be supportive.
The pound is likely to receive support from continued rhetoric regarding an interest rate rise since there has been a distinct hawkish turn by MPC members over the past few months. Arch-dove Gertjan Vlieghe has been calling for both an interest rate hike and a more considered programme of hikes in normalize rates.
The other significant influence of the pound is, of course, Brexit.
The agreement of a transition period has been well received by the market but the true cost in both financial and political terms is not yet fully clear. The UK will continue its budget contributions during the transition but any “divorce payment”, a kind of “Brexit alimony” has yet to be fully publicized.
Then there is the Irish border question, or as Theresa May has taken to calling it the Northern Ireland question. It is rumoured that there has a concession from the UK over the Border in the transition talks and if that is detrimental to the North, it could have serious consequences for the UK Government and the pound.
Three Hikes, four hikes?
It is almost impossible to trace a path for the dollar since this Presidency has been characterized by hard to predict and often hard to explain policy changes.
If we consider that Trump will be “dollar neutral” in Q2 what else can be expected to drive the greenback?
Monetary policy appears to have been placed on a solid and considered footing by new Fed Chairman Jay Powell.
Rates will be hikes three times in 2018, that is to say twice more unless data dictates a more hawkish approach. The Q1 GDP will play a major role in that decision but that is not released for six weeks or so yet. More immediate is this week’s employment report which will be the major short-term event of the first week of the quarter.
The headline can be pretty much disregarded as it is as close to a work of fiction as you can get. The expectation is for 200k new jobs to have been created but a downwards revision of the exceptionally strong February number will have more effect on the dollar. Average hourly earnings will also command attention. There is an expectation of a rise from 2.6% in February to 2.7% in March which could drive inflation expectations and any better than expected number will drive trader’s thoughts back to four hikes.
Euro to continue to make serene progress.
At some point the ECB General Council is not only go to discuss the withdrawal of the Asset Purchase Scheme but publicly admit to doing so. The attempt by the Head of the Finnish Central Bank to support his President’s view on the scheme by saying the argument is balanced and an increase in the scheme could be considered, has been largely ignored and rightly so.
Since the market is split on the timing of any move and other factors continue to provide a neutral backdrop for the common currency, it is fair to assume that the well-set range will remain in place.
The future drivers also seem to add balance on the one hand, monetary policy will have to be tightened at some point, but the spectre of the one trillion-dollar bad loan portfolio of Eurozone banks will also have to be dealt with.
The Euro is in a reactive mode since its range is so well known.
Given the drivers of other major currencies, a long Eur/Jpy position or a long Eur/GBP position are the most likely to bear fruit since versus the dollar it is likely to simply tread water.
Black swans
Of course, we are not considering a black swan event. Since they are unpredictable it is hard to do so but these are a few contenders:
- A UK General Election
- North Korea abandoning its nuclear ambitions.
- President Trump being impeached
- A major escalation of the diplomatic crisis with Russia
- A large terrorist incident anywhere in the world.
