Pound Roars And Dollar Falls On May's Signals

Originally published by https://www.axitrader.com/au
h2 Quick Recap/h2

There is nothing like clarity to turn around a market. And that is exactly what British prime minister Theresa May sought to give UK citizens, traders, and markets in her speech overnight. That ignited a monster rally in the pound which in turn hit the US dollar for six across the board with the euro, yen, Aussie, other currencies and many commodities – including gold – rallying hard.

Stocks in Europe were lower however and US equities finished in the red. Financials in particular were hammered in the US down around 1.9%.

• Prime Minister May’s speech had been largely leaked in Asian trade yesterday. I summarised what we knew about May’s plans here in a piece yesterday. But the key was 4 guiding principles and 12 core objectives. But essentially the UK is out and wants a new deal with the EU.
• The fact that what we saw in Asia was the core of a hard exit for Britain yet Sterling didn’t go down was a sign of Sterling strength but the kicker was May’s signal overnight that both Houses of parliament will get a chance to vote on the deal meant that traders appear to have taken this as a salve for the fear of super hard Brexit.
• Yes I know that sounds nuanced and stupid. But the reality May appears to be doing a reasonably job of being both strong and conciliatory and that has encouraged foreign exchange traders and investors. So sterling is up 2.86% at 1.2389 (at 5.30 am AEDT).
• Pound strength had already encouraged traders in early Europe to sell dollars and that continued overnight. Many are now attributing that to Trump’s comments about the US dollar as well – something I talked about on Monday. More on that in the Forex section below.

• President Xi went to Davos bearing gifts in the form of an opening of the Chinese economy to new foreign investment while at the same time making a case for China to take a global leadership role. Xi argued against protectionism saying it was like “locking oneself in a dark room” in the hope of staying safe and protecting from danger when in fact all it did was cut off “light and air”. He also added – perhaps iron hand in a velvet glove style – “No one will emerge as a winner in a trade war”.
• Xi did also acknowledge the downside of globalisation noting that it had become a Pandora’s box and then quoting Charles Dickens opening line to a Tale of Two Cities saying “it was the best of times, it was the worst of times”. A tale of two economies perhaps. But that is exactly what is driving the populist surge in developed economies as many voters have felt left behind by globalisation.
• Xi also said China’s economy would be driven by a “new normal” of household consumption.
• Back in the US and Fed Governor Lael Brainard said that Trumponomics fiscal arm and stimulus could fuel a lift in inflation. “If fiscal policy changes lead to a more rapid elimination of slack, policy adjustment would, all else being equal, likely be more rapid” she said. Brainard also said full employment is within reach.
• But NY Fed president Dudley said that regulatory changes could make businesses and workers more productive. That would be an important offset to any upward inflation pressures.
• After the IMF upgraded its global growth outlook the previous night the UN joined the party overnight. The UN said it upgraded 2017 growth from 2.2% in 2016 to 2.7% this year and 2.9% in 2018. Importantly it has China penciled in for 6.5% growth and India in for 7.7%. It’s a little worried about Trumps policy prescription however. NB: UN has lower growth numbers than the IMF because the fund uses PPP. But the message is clear…the global economy is picking up after a slow 2016.
• Bonds are lower again this morning. US 10’s are down at 2.33%, German 10’s at 0.32%, and 10 year UK gilts are sitting at 1.4%.
• UK inflation has been getting a lift from a weaker pound. For the month of December headline CPI inflation rose 0.5% taking the year on year rate to 1.6% its highest level in two years.

• The local market had a bit of a shocker yesterday with the ASX 200 dropping around 50 points to close at 5699. The big banks lost 1% and the materials sector was under pressure as well as base metals and iron ore were sold heavily in Asian trade.
• The overall level of weakness was in ine with the weekly rejection of the big downtrend line from the alltime high I highlighted earlier this week. So on that basis it feels like the Aussie market needs another rally in US stocks to regain its footing. Otherwise its at risk of a deeper retracement. Here’s the SPI 200 chart.

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• On the data the chances of an RBA rate cut receded further into the ether yesterday with a 4.9% jump in investment lending and and another surge in new motor vehicle sales. Both stats talk to an economy that doesn’t need any further monetary accommodation.