Carney decision illustrates lack of options

In the rarefied atmosphere of the world’s top Central Banker jobs, there is never very much choice and timing is everything. A cynic may say the BoE Governor Mark Carney has agreed to extend his contract with the Bank of England, which was due to expire next June, due in no small part to the lack of suitable alternatives.

He apparently had his eye on the top job at the IMF, but Christine Lagarde is unlikely to move on, so he has decided to stay put. Ms. Lagarde is an outside bet for the position of ECB President but there are several candidates ahead of her.

It may well be comforting to have Carney remain as Governor through what is bound to be a turbulent period and it allows Chancellor of the Exchequer Philip Hammond to concentrate on the economic fallout from Brexit.

However, the Central Bank cannot influence the Brexit agreement and will be more involved in picking up the pieces and ensuring ample liquidity if necessary.

The pound rallied on the news and on a rumour (most likely spurious) that Brussels is preparing to soften its stance over the issue of the Irish border. It reached 1.2877 versus the dollar and 1.1125 versus the euro although it has failed to hang onto those gains overnight.

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Interminable trade conflict continues

While several emerging market currencies continue to fall to all-time lows, hit by sustained risk aversion, the talk of an all-out trade war drives the dollar higher.

It is difficult to see how President Trump can continue to threaten China for a crisis that is homegrown. It owes itself almost entirely to the avarice and lack of foresight from Trump’s friends and colleagues in big business. As stock prices have grown on increased profits and the rich have got richer, the trade deficit has grown and domestic manufacturing has been decimated

Now, to address the balance, the President is trying to bully China into opening its markets to the few manufactured goods still produced in the U.S. and expensive (in global terms) American raw materials. The threat of an all-out trade war has hit currencies like the Indian Rupee and Iranian Rial which have both seen precipitous falls and driven the dollar higher. The dollar’s rise is somewhat incongruous since a weaker dollar forms one of the aims of the “America First” strategy.

The dollar index appears to have bottomed in the short term and reached 95.74 yesterday. That is still well short of the 96.99 high seen recently which is a medium-term top for the greenback.

Italy threat growing

It would be ironic if, while Brussels was dealing with Brexit, and a country to which there is thinly veiled indifference, they failed to notice and deal with a growing issue from within the centre of the bloc.

The belligerence of the populist Italian Government is not going away and it has a platform for reform that is at odds with the EU’s rules.

It remains to be seen just how hard Rome is prepared to push over immigration and the budget deficit, but Brussels will do well not to ignore them and simply quote statutes.

This week the Italian Government will set out its tax reform and spending plans and is expected to continue to act in accordance with the proposals set out in its election manifesto. The Cabinet are keen to be considered the “real deal” after decades of corruption and self-interest in Italian politics. This could set them on a collision course with the EU Commission.

The rulebook regarding budget and fiscal deficits is sure to be challenged attracting penalties from Brussels which could ignite a spiral of conflict that could see Italy ask its people to decide between the confines of the EU and the traditional high-interest rate/high inflation policies that were the “Italian way” prior to 1999.

The single currency fell to a low of 1.1530 yesterday although it subsequently recovered to close at 1.1581. It has major support at 1.1480 which unlikely to be tested in the short term without a significant event to drive it.