Big week starts with G7 in Disarray

Trump to meet Kim after G7 fiasco

As globalization has continued and wealth has become more distributed, the G7 has started to become like a group of schoolkids who meet in the playground with no other purpose than to stop other kids joining their gang. The relevance of G7 has been fading ever since the Soviet Union broke up and China emerged as a world power after years of self-imposed seperation.

This weekend’s summit hosted by Canadian Prime Minister Trudeau descended into farce as President Trump left early and then tweeted that he did not want to be a joint signatory of the communique. He rounded on M. Trudeau, calling him dishonest and weak as global trade matters boiled over. Trump believes that, for years, the rest of G7 have allowed their currencies to weaken expecting the dollar to “take up the slack”, and those days are over.

The President has now flown to Singapore to meet with North Korean Supremo Kim Jong-un.

How that will turn out is anyone’s guess.

The FOMC meets this week and a rate hike is fully priced in. Traders are now more interested in the outlook for the rest of the year as it appears that the dollar’s interest rate advantage may start to be eroded as we enter 2019.

The dollar index rallied to a high of 93.82 before falling back as news of the rifts developing in Canada became known. It closed at 93.55 and has remained in a narrow but slightly weaker range as the week has started in Asia.

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Sterling facing a tough couple of weeks

It was announced late last week that the UK’s full set of proposals for the future relationship with the EU will not be released before the EU summit which takes place in Brussels on June 28/29. This was a major surprise and puts the ability to have negotiations completed by October in doubt.

If the manner in which the “fudge” over the Irish border was received is any indication, the rest of the proposals face a bumpy ride.

This week the focus will be on the UK as data for employment and inflation is released and the House of Commons votes on the amended EU exit bill which was savaged by the Upper House.

Inflation is expected to have remained unchanged as the rise in Sterling through Q1 has now run its course but the fall through April hasn’t yet taken effect. Producer prices which are also due for release on Wednesday are expected to have risen as the effect of a weaker pound is more immediately felt.

Employment data is expected be almost unchanged from May as the improvement in year on year figures slow considerably.

Sterling will not gain any monetary support either as both the ECB and FOMC, which has already started in the U.S., begin to tighten while the UK is going to be unable to raise rates despite inflation bottoming out well above the Government’s target.

The pound closed on Friday close to its opening level although it had a volatile day reaching a high of 1.3440 and a low of 1.3354 before rallying a little, to close at 1.3407. Versus the single currency, it had a better day reaching 1.1417, before closing at 1.1399.

Euro set to be driven by monetary Policy

Central Banks have varied in their attitude to advance guidance as their views have been sought on when rates will return to “normal” and the extraordinary levels of accommodation will be removed.

Although the ECB in general, and its President in particular, have chosen to remain tight-lipped, last week saw a sea-change in their attitude as the Chief economist and the heads of the German and Dutch Central Banks were positively verbose in letting markets know that the tapering of the asset purchase scheme would be discussed at this week’s ECB meeting.

Just what that means remains to be seen since that is most likely a topic at most meetings. As is common in such situations, traders put their own spin on the remarks and have already started to price in the first rate hike following tapering.

With the political situation in both Madrid and Rome having calmed somewhat despite fears over what may happen in Italy, the ECB is starting to feel that inflation could become an issue and some action may be necessary. The advance guidance has been just about as timid as it could be considering the probable effect on the euro of a series of rate hikes, or even the promise that they will start with the removal of accommodation.

The euro corrected a little on Friday as traders became wary of becoming too bullish ahead of the meeting, as the words of the three speakers were dissected a little more. It fell to a low of 1.1726 before recovering to close at 1.1770.