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Market News – 16 January 2017

Reports yesterday that Prime minister Theresa May would outline moves for a hard, clean break from the European Union has caused a Sterling sell-off this morning. At one point, the pound had lost 1.6% against the US Dollar.

President-elect Donald Trump’s inauguration is this Friday, 20th January. The beginning of a new era for the US – potential trade wars, huge adjustments to both monetary and fiscal policies along with import tariffs and the potential lifting of economic sanctions.

GBP

Sterling is trading lower this morning amid concern the UK government is preparing to pursue a hard Brexit. The pound hit a three-month low during the Asian session, hitting lows not seen since the October flash crash. The UK government is drawing up plans to try to reassure investors surrounding expectations that Prime Minister Theresa May’s long-awaited blueprint for Brexit will cause more market turmoil.

Government officials expect Sterling to take another hit when May sets out her vision for leaving the bloc in a speech tomorrow and the Treasury is preparing to speak to major banks in London to try to smooth the reaction.

May will apparently say that the UK is ready to leave the single market if other members of the European Union are not prepared to give Britain control over immigration.

Traders expect the realities of Brexit are still not fully priced in and that new lows will be tested over the weeks ahead.

EUR

The European Central Bank will wait until late this year before considering reining in its bond-buying plan, and won’t halt the program until well into 2018 at the earliest. President Mario Draghi is likely to come under increasing political pressure in stronger economies such as Germany if he continues to add stimulus while prices climb.

The ECB and the UK should share regulation of the Euro clearing market, according to one of its lobbying groups. Such a move would mean the UK giving more powers to the ECB to oversee London’s Euro clearing business and would help prevent any damaging splits in the global derivatives market.

The European currency may cease to exist in 10 years without significant economic reforms, mainly by France and Germany, according to French presidential candidate and former economy minister Emmanuel Macron.

“The truth is that we must collectively recognize that the Euro is incomplete and cannot last without major reforms,” Macron said in a speech at Humboldt University in Berlin on Tuesday.

USD

US President-elect Donald Trump’s threat to impose a 45 percent tariff on imports from China is no longer being dismissed as mere election rhetoric following his nomination of two prominent China critics as key members of his trade team and the discovery of a long-forgotten presidential power to raise tariffs.

Even though Trump has vowed to pursue a more aggressive trade policy with China, it was previously believed that United States law only allowed a president to unilaterally impose tariffs of up to 15% for as long as 150 days, however this seems to be incorrect according to recent investigations.

The Dollar moved lower last week as the unwinding of the so-called “Trump trade” resumed as expected. The greenback has been mostly on the defensive since the calendar turned to 2017, managing only a brief respite after data revealed an unexpectedly strong pickup in wage growth in December.

Rest of the World

The Mexican Peso weakened last week to fresh record lows against the US Dollar. However, Goldman Sachs strategist Kamakshya Trivedi expects the currency to rally 13% against the Dollar in 2017.

The Australian Dollar is at risk of becoming collateral damage in what looms as an increasingly likely trade war between the US and China. On Thursday, the Australian Dollar surged to its highest level against the greenback in almost a month following Donald Trump’s first formal press conference as US president-elect.