Brexit countdown beginning in earnest

Two Opposition Parties are considering moves this week to oust Prime Minister Boris Johnson and replace him with a “temporary” Prime Minister until no-deal can be confirmed following which a General election would be held.

The major issue, and the reason that Labour and the Scottish Nationalists (SNP) cannot agree, is who that temporary Prime Minister should be. The Labour Party as the main opposition party thinks it should be their leader Jeremy Corbyn. However, the SNP would accept a more Eurosceptic member of the current administration.

It all points towards another busy week for politicians with a no-confidence vote likely to disrupt the Conservative Party Conference which began on Saturday. Government MP’s could be faced with having to scurry back to Westminster before their Conference ends. One of the more interesting events at the Conference, if it manages to happen, will be just how Boris Johnson’s keynote speech is received. Given the overwhelming support he received from the rank and file of the Party, he should receive a sustained standing ovation.

Last week was all about the fallout from the suspension of Parliament being deemed unlawful by the High Court. The market now appears to be focussing on Brexit taking place and the upheaval that will cause the economy longer term. If Johnson is ousted this week and Brexit is extended until next January, the newly elected Government will be faced with the task of finding a deal that satisfies not only Brussels but also the new Parliament.

Last week, Sterling drifted lower as the market saw the future effect of the UK outside the EU with a clearer focus. It fell to a low of 1.2270 versus the dollar, closing at 1.2288.

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Non-Farm Payrolls to set the tone for the Greenback

It seems that the market is providing a perverse testimony on the actions of the Trump Administration by buying the dollar despite its continued argument that other developed nations are keeping their currency artificially low.

Given that the market allows a “special dispensation” to Japan, given it can keep rates close to zero due to non-existent inflation, it is primarily the UK and, more especially, the Eurozone that Trump is most concerned about. The Chinese Yuan is also very weak, but Trump is in a difficult position. Since Beijing controls its currency, it has allowed it to weaken to offset the effect of the tariffs that Trump has applied to U.S. imports from China. The more tariffs are applied, the lower the Yuan will trade.

The dollar index which is made up of the Euro (57.6%), JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%) and CHF (3.6%), is particularly susceptible to any significant volatility in the euro.

Given the current economic weakness being exhibited by the Eurozone, the dollar index has, naturally, rallied. It is hard to imagine that President Trump really sees the current weakness of the euro as being artificially manufactured and has demanded that the Fed cut rates to offset the issue. The effect of the two recent cuts is yet to be fully realized and until the effect of those moves on inflation is fully comprehended, the FOMC is unlikely to cut again.

Last week, the dollar index closed above 99 for the first time since May 2017 and unless there is a significant turnaround in the fortunes of the Eurozone, it could easily reach 100.

The highlight of this week is the release of employment data on Friday. While market expectations have been reined in a little, there is an expectation that last month’s +130k new jobs created could be eclipsed. Average earnings are expected to remain at 3.2%, well above the rate of inflation which will also be of concern to the Fed.

Chairman Powell is making a speech later on Friday and any comment about the jobs data will be eagerly devoured by traders.

Another month, another setback?

It is hard to imagine that the activity data for either Germany or the wider Eurozone could possibly be as bad as it was in August, but traders won’t be relieved until they see the data in black and white. Any thought that the economy couldn’t weaken any further was dispelled by the September data but with the ECB powerless to intervene further, unless there is a structural change, Mario Draghi’s time as President will end as dismally as it began.

Most of the talk of Brexit has been directed at the effect it will have on the UK economy but given that the UK is a significant trading partner of the EU, and will certainly be the biggest with which a free trade agreement doesn’t exist, the effect of the UK’s departure could be the final straw leading to a potentially long and painful recession.

Last week, the euro broke the psychologically important 1.10 level versus the dollar and is now looking likely to test the long-term technical support at 1.0840.

With investment in the region weak and exports suffering from the current global uncertainty, there seems little reason to buy the single currency until the domestic market starts to improve.

The upcoming EU summit will have to take some time away from Brexit to discuss what measures are available but as the window for acting before a recession hits is closing rapidly urgent decisions will need to be taken.

Last week, the euro made a low of 1.0904, closing at 1.0939.