Traders hope for the best while fearing the worst

The reaction of the pound to the continued “jawboning” taking place in the UK Parliament is beginning to reflect the feelings of a larger percentage of the UK population.

There is a sense that MPs are far more interested in scoring points from each other than actually getting a deal done and this is souring even further the already low opinion of the public.

Brexit has been hijacked and turned from the genuine demand of the majority of the population into a Party Political quagmire from which there is no escape.

As had been demanded by Parliament, Theresa May, the Prime Minister, came back to the House of Commons yesterday with what was supposed to be her “Plan B” following last week’s rejection of her draft agreement.

She had nothing new to suggest that she has any notion of how to; a) stay within the “red lines she has committed to, b) convince Parliament that she can deliver on the wishes of the people and c) wring any further concessions from Brussels. So, the debate continues with a vote next Tuesday although what the substance of the motion will be is anyone’s guess.

It is an almost unique experience for FX traders that the continued uncertainty is almost a positive for Sterling since it appears more likely that a soft Brexit is possible. The reality is that the closer to March 29th it gets with no agreement in place, the default position of the UK crashing out of the EU with no deal remains a possibility.

This highly unusual situation has led to traders “sitting on their hands” and reducing the size of their positions while observing the entire debate with little more than academic interest. The pound traded in a narrow band yesterday between 1.2911 and 1.2830, closing at 1.2893. Until there is some clarity of what is going to happen going forward, this situation is likely to continue.

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Chinese growth data points to dollar “safe-haven” buying

The Chinese economy grew by just 1.5% in Q4 ‘18, its slowest rate since 1990. This reflects two conflicting issues both of which point to the growing importance of China as a global economic power.

First, the slowdown points to lower global economic activity as the export of finished goods by China has slowed which leads to a reduction in import of raw materials affecting the economies of countries like Australia. Second, the Chinese economy is “maturing” far faster than economists had predicted. The expectation had been that China would continue to grow at a quarterly rate of around 2.5% for at least three more years while the “urbanization” of the country continued.

Concerns over a new economic paradigm in China and its knock-on effect led to buying of the dollar as a safe haven as emerging market concerns re-emerge.

It is doubtful that the continuing trade dispute between China and the U.S. has had any material effect on Chinese growth. The market attached a greater significance than necessary to what remains little more than a spat between two nations who realize that as time goes on, they become ever more reliant on each other as the volume of Chinese production needs a certain level of U.S. consumption and vice versa.

The dollar index remains well supported despite trading in a narrow range yesterday. It reached a high of 96.43, closing at 96.34. In a similar manner to Brexit, traders are unable to fathom just how the ongoing Federal Shutdown will end and are simply marking time until a solution is found.

Euro continues to hope for another Draghi “miracle”

Such is the faith of the financial market in ECB Chairman Mario Draghi and his stoic determination to ensure that both the Eurozone economy and the single currency flourish that it is prepared to believe that despite evidence to the contrary, the regional economy can avoid a recession.

This week’s ECB policy meeting and the press conference that will follow provide another opportunity for Draghi to “pull a rabbit from the hat”. Apart from the re-introduction of the Asset Purchase Scheme which, in reflection, needed to be increased rather than wound down late last year, it is difficult to see what else the ECB can do. It is unable to provide a fiscal boost as was seen in the U.S. last year and any policy to weaken the euro to boost exports would be unlikely to be supported, in particular by Germany, given its inflationary ramifications.

For the time being, the best the market can hope for is that the economy continues to “bump along the bottom”.

The political outlook remains unclear with a spat developing between two of the more unstable economies, Italy and France, over French involvement in Africa.

Luigi di Maio, the Italian Deputy Prime Minister appeared to lay the blame for the migrant issue which has been going on for several years now at the door of “past and continued colonization of Africa by France”. The Italian Ambassador to France was summoned by the French Ministry of Foreign Affairs to explain Di Maio’s “unacceptable and groundless comments”

The Governments of France and Italy lay at the opposite ends of the “federalization spectrum” within the EU and Eurozone. Such a spat, while not common, marks a further ratcheting up of tensions between the second and third largest economies in the region.

In keeping with a quiet day in the market and the expectation created by the ECB meeting, the euro drifted fairly aimlessly yesterday. It gained only minimally on the day closing just six pips above its open at 1.1368 but has fallen overnight to a low (0615GMT) of 1.1349.