Barnier issues tough response to May’s comments

It seems the time for a “bumpy ride” is upon us. Both sides in the Brexit negotiations set out their stall for the ongoing talks over the weekend and the outlook remains decidedly stormy.

Theresa May, the UK Prime Minister, made the headlines in many of the weekend newspapers by confirming that there will be no second referendum on Brexit nor any further concessions to seal a deal with Brussels. This would have disappointed the “remain” flank of her party coming on the heels of her recent speech in which she reiterated the “no deal better than a bad deal” rhetoric.

In what was clearly meant to be the two sides “setting out their stalls.” EU Chief Negotiator Michel Barnier had several things to say in a German newspaper interview that countered Mrs May’s comments almost before the ink was dry.

He rejected the idea of a “common rulebook” for goods but not services commenting that even without free movement, goods and services are becoming more intrinsically linked. He used the example of mobile phones where the physical handset is rarely sold without a service contract relating to airtime. He also reconfirmed his usual argument about the UK wanting to “pick and choose” while the basis of the entire concept of the EU is that the four movements are indivisible.

The pound closed on Friday at 1.2958 having lost ground versus the dollar as optimism following Barnier’s earlier comments dissipated. It has opened this morning in Asia at 1.2914 but has so far shown little sign of moving any lower.

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Trade to drive dollar as NFP looms

The dollar is going to spend the first part of the new month driven by two issues over trade that the President will certainly have plenty to say about.

There is no mystery as to why President Trump is trying to rally the country behind his demands for the U.S. to be treated fairly in global trade. He wishes to deflect attention away from his domestic problems as the “net tightens” over the investigation of payments of “hush money” and Russian involvement in his election victory.

U.S. trade negotiators failed to get Canada to cave in over NAFTA 2 in the same manner as Mexico did last week and now there are set to be protracted negotiations with a country prepared to give as good as it gets.

Another such opponent is China which is sure to react to the threat of the enactment of a further $200 billion of tariffs with similar retaliations of its own.

While these “talks” continue, the dollar gains on the back of risk aversion created by fears that they could boil over into a full-fledged trade war where previous deals get ripped up and trade reverts to WTO rules. While we are still some way from that happening, the threat remains.

The dollar index rose to 95.23 on Friday before closing at 95.12. So far this morning it has remained in a very tight range.

The latter part of the week will be dominated by the U.S employment report which will be released on Friday. Analysts predict a headline number of 180k new jobs created and wage inflation remaining at 2.7%. There is some speculation of a rise to 2.8% which will give some support to the dollar. Any revision to July’s weak headline of 157k may also see the dollar receive some support.

Turkish loans overhang the euro

The Bank for International Settlements, often called the “Central bank of the Central Banks” released data last week that showed that Turkish borrowers owe €194 billion to Eurozone banks. This is an appreciably higher number than had previously been speculated about and raised concerns about what would happen in the event of a further precipitous fall in the value of the Turkish Lira.

The entire purpose of taking loans in euros is to take advantage of the lower interest rate compared to the Turkish Lira and therefore the loans remain unhedged. That is to say that the borrowers have converted the proceeds to their own currency and at some point, will have to buy euros to make repayments. Should the Turkish Lira weaken further, they may be unable to do so.

This could bring contagion across the entire Eurozone with the banks’ capital adequacy, which is already under threat, taking a hit which in some cases could prove fatal.

With Brussels also likely to become embroiled in a row with Italy over its debt ceiling, the outlook for the euro is gradually diminishing.

Any escalation of the Turkish issue may also have ramifications for the ECB who may very well defer plans to start to lower the level of the Asset Purchase Scheme seen as a precursor to an interest rate hike around this time next year.

The single currency fell to 1.1584 on Friday but has started to week in the front foot rising to 1.1611 so far this morning.