Brexit Confusion Continues

Conference speeches confirm muddled thinking

The Conservative Party’s Annual Conference was supposed to be an opportunity for the Government to mend cracks that had become chasms between Cabinet colleagues over what kind of Brexit the ongoing negotiations could or would produce. In a confusing pair of Speeches Boris Johnson, the Foreign Secretary and David Davis, the Brexit Minister appeared to change places. Johnson backed “every syllable” of The Prime Minister’s recent speech in Florence while Davis spoke about walking away if no deal can be reached.

This all but confirmed the muddled thinking and dubious reasoning that is pervading the Government with a hard Brexit becoming more of a possibility every day.

Sterling has almost become immune to talk over Brexit, now only reacting to the effect it is having on the economy and future monetary policy. It has also become reactive to drivers of other currencies. Versus the dollar, the pound fell yesterday reaching a low of 1.3222 as rate hike expectations drove the greenback to six weeks highs versus a basket of its trading partners currencies. The common currency clawed back some of its recent losses despite the recent political upheaval. It reached 0.8883 versus Sterling although any follow through is likely to be limited given the political headwinds now facing the region.

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Monetary Policy still the prime influence on currencies

There has been an air of the “end of an era” as G20 Central Banks line up to start to tighten monetary policy either by withdrawal of extraordinary stimulus or hiking interest rates. The Fed, BoE and ECB are at varying stages of preparation for a normalization.

The Fed has started already and will likely follow up the start of the reduction in its balance sheet with a further rate hike in December. The U.K. is toying with a rate hike next month try to control inflation, but with every new data release the reasoning behind a hike becomes more blurred. ECB President Mario Draghi has been clear in his desire to keep rates on hold and to provide a “level playing field” to all Eurozone members and now with the return of political uncertainty a change in monetary policy is even further in the future.

Janet Yellen has now been put in a particularly invidious position with the names of her likely replacement being discussed when it hasn’t been officially confirmed that she won’t be reappointed. The Heads of the BoE and ECB are beginning to reach the end of their terms. Draghi will be leaving the ECB (to be most probably replaced by the President of the Bundesbank) in December 2019 with BoE Governor Mark Carney will leave his position in June of that year. This was supposed to have been after Brexit but with a transition period likely to be agreed, his successor will be plunged into a difficult scenario.

Euro calm as Catalonia continues independence plans

There are many regions of Europe where there are mumblings about independence with nine that are prominent and where the threat of secession is serious; Basque Country, Flanders and Wallonia, Veneto and Lombardy, Corsica, Scotland, Bavaria, Brittany, Sardinia and South Tyrol. Sure to be emboldened by the result of the Catalonia referendum they are likely to bring further headaches to Brussels and the politicians of their “home countries”.

The President of Catalonia has declared that he will announce independence from Spain in the “next few days”. Carlos Puigdemont encouraged by the overwhelming result of the vote while the king of Spain has described the Catalans as acting outside the law and called the situation “extremely serious”.

The Euro has barely reacted to the threat of Catalonian independence yet as traders digest the significance to the entire region. It is the greater political significance particularly if it does fuel further revolt across Europe that will concern Brussels.

In a note to clients recently, Barclays Bank said that the threat of independence in the near term is close to zero!

An independent Catalonia would not be an EU member and any application to join would most likely be vetoed by Spain. This would leave them outside the single market with all the ramifications that have become all too clear recently.