Brexit, Brexit and more Brexit!

The only game in Town!

I never thought I would miss writing about President Trump but given the downbeat demeanour of EU Council President Donald Tusk yesterday, this could turn into a very long two years!

So, it’s happening! In 24 short months, whether there is a deal or not, the U.K. will leave the E.U. Whether that departure is by a three or four country U.K. remains to be seen.

Full marks to the Scottish Nationalists for announcing their plans for a second referendum with perfect timing.

The pound did a little “volatility dance” yesterday finishing little changed against both the dollar and single currency having traded lower during the day.

When you get fed up with terms like; single market, free movement, laws made in Britain, hard Brexit and soft Brexit we will need to change the record!

Where are Trumps sound-bites when you need them?

Sterling undervalued? Quite possibly

The voracity with which the market dug into selling the pound following June 23rd is now being called into question by those same traders.

We are now getting reports that, in fact, those who predicted a fall to 1.1000 and.9000 against the Dollar and Euro were simply whistling in the dark. As with all rumours the rumour has some basis in fact. Access to the single market is vital to the U.K. economy and any restriction will be detrimental to the economy.

It is equally true that the U.K. is the E.U.’s third largest buyer of its goods. The E.U. cannot afford to play hardball too vigorously as the U.K. will soon have unfettered access to the rest of the world.  While it may nicer to drive a Mercedes than a Lexus (maybe not), the Lexus at 30% cheaper becomes a viable option!

One report from a bank that doesn’t pay me so shall remain nameless said it believes the “true value” of Sterling is closer to 1.35 and 0.8000 and that the selloff was overdone and became a beast that fed on itself.

There are still banks calling for 1.1000 and parity and there is no way of knowing if they are correct but at least it gives their corporate teams something to talk to their clients about.

I used to travel to visit clients with an economist who had a very good reputation. Once, while travelling alone, I was asked “where is your economist today? I like talking to him. He is always wrong about the market but he tells such a convincing story!” What is that line from Butch Cassidy and the Sundance Kid? I paraphrase but it is something like “that guy is so believable that if he told me I left gown ten minutes ago, I would believe him!  

Major surprise; ECB not about to hike rates!

The Euro was weaker overnight following the revelation that for the ECB, that is charged with creating monetary policy for the whole EU not just Germany, is not about the tighten monetary policy.

There is going to obviously be some tapering of the emergency measures but despite the financial crisis being over the economies of the member states of the monetary union are still very fragile.

With elections in France, Germany and possibly, Italy this year, not to mention Brexit there are plenty of headwinds!

There is still a lot to come from President Trump about his own stimulus package which, should, be good for the dollar. Furthermore, several FOMC members have pronounced themselves satisfied at the pace of monetary policy tightening seen so far in the U.S. with more to come.

The trajectory of interest rates is the one true measure of currency value that drives the FX market. Concerns over currency manipulation and protectionism may be the froth on the cappuccino but monetary policy is the truest measure.