Korean Peninsula concerns driving risk aversion
The U.S. administration has accused North Korean Leader Kim Jong-un of rushing headlong into conflict with little regard for his people or the effect on the region. The seemingly unstoppable march towards a nuclear weapon capability has brought about a rise in risk aversion with its consequent effect on the currency market.
The Japanese and Swiss currencies, traditional beneficiaries of risk aversion have appreciated and been joined by the Euro which has attained safe haven status as the region has shown economic and political stability added to which it has a healthy current account surplus.
North Korea’s neighbours, major U.S. allies South Korea and Japan stand firmly in the firing line should the tension escalate into conflict. Seoul is home to some major global brands and the effect on the global economy of any disruption in Japan, the world’s third largest economy could be catastrophic
The euro regained the 1.1900 level reaching 1.1923 while the Yen remains below 110.00. There have been reports of a missile being moved across North Korea to prepare for launch so tensions will only increase in the coming days.
Return of Parliament to add to Political Drama
Throughout the summer, the British Government has had a relatively comfortable ride over Brexit, certainly from a domestic perspective. Following the election, where the populace had their say on the performance of the ruling Conservative Party, talks have been allowed to take place at a pace and intensity of the Government’s choosing. That is about to change as the accountability to Parliament returns with MP’s summer recess coming to an end.
David Davis the Brexit Minister and Leadership favourite, should Theresa May be forced out, faces Parliament to brief them on progress (or lack thereof) during their absence. That will be followed by a debate over the bill to repeal the act which took the U.K. into the Common Market in 1973. Further disruption to the process which has barely started will draw a heated response from Brussels which is becoming ever more frustrated by the lack of progress both perceived and actual towards a satisfactory settlement.
The pound continues to be on the backfoot against the Euro, but Brexit can only be indirectly blamed for its fall. The relative economic situations give rise to either Sterling weakness or Euro strength but given the trade weighted rise in the single currency it is the common currency that is the major driver. Brexit and its issues are well priced into the value of the pound and further falls will be driven by economic conditions both current and future as predicted by sentiment indexes.
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ECB meeting to defer withdrawal of stimulus
Few can fault the performance of the ECB as the Eurozone finally emerges from the dark days of the credit and banking crisis which threatened the envelop it over the past seven years or so. However, it will need to continue to provide clear guidance as the economy picks up and inflation starts to rise. There can be little doubt that sound economic management has been laced with a slice of luck as one or two nations were beginning to criticize the lack of action when the Euro threatened parity earlier in the year.
Despite the ECB’s performance the drivers of disenchantment which contributed to Brexit still exist. A prime example of this was yesterday’s speech by German Chancellor Angela Merkel in which she said that Turkey would never be allowed to join the EU. Whilst this is a clear election message to those Germans concerned about the burgeoning Turkish migrant population, it is also synonymous with the political drivers and bureaucratic malaise which affects the region.
While the political concerns in individual countries have gone away the lack of a strong leader able to promote a “one voice” policy will make it difficult for progress to be seen. The EU is facing challenges from its eastern side with the Polish changes to its legal system and Hungary demanding compensation for the wall it has built to reinforce its border.
