Good morning,

GBP – Volatility is assured

It was another rollercoaster day for sterling yesterday with yet more Brexit headlines published – and subsequently denied. Nobody really has a clue, least of all sterling. That said GBP, was sent higher on a Bloomberg report that “the British and German governments have abandoned key Brexit demands, potentially easing the path for the UK to strike a deal with the European Union.”

Sterling’s rally higher lasted about 90 minutes before a spokesman for the German government told reporters that its stance on Brexit is unchanged. This will happen again and again as we get closer to the end of Article 50; an elaborate game of chicken with the UK economy.

Yesterday’s data showed us yet another survey detailing Brexit uncertainty weighing on a part of the UK economy. As in both Monday’s manufacturing and Tuesday’s construction numbers, confidence is falling in the services sector as businesses struggle to formulate investment and trade plans beyond next March.

Margins remain compressed as well, with costs rising but prices charged remaining well below the level seen last year. Brexit uncertainty, weak consumer dynamics alongside a devalued pound are hammering corporate profitability in the UK’s most valuable sector and, for now, we think will keep a lid on both wage increases and Treasury tax receipts in the coming year.

It is too early to tell whether the recent increase in interest rates is having a bearing on the sector but given everything else that is affecting their industry, services businesses will be hoping that borrowing costs stay as is and politicians, finally, put together a Brexit deal that businesses can plan around.

USD – Palace intrigue

The dollar is roughly unchanged overnight with a lot of its focus bearing down on Emerging Market currencies. We are not seeing contagion yet in dollar and funding markets from these moves in Argentina or Turkey as yet although that is not to say that we won’t.

Some weakness in the dollar may have come through from an anonymous op-ed in the New York Times by a senior White House official in which the unnamed insider claims there are those on the inside that are working to thwart and frustrate the President’s agenda. Similarly, the weakness could be as much about a speech by Fed member Kashkari emphasising the weakness in pay conditions in the US economy.

We mistakenly reported that the US’s ISM on its Non-Manufacturing economy was yesterday when it is actually scheduled for release today at 3pm.

CNH – Not in the emerging market firing line at the moment

Despite the focus on emerging markets at the moment – Asian equities are taking a bit of thumping at the time of writing – the yuan has been quiet. Our analysis here at WorldFirst suggests that while there are individual, idiosyncratic issues that will weigh on the yuan – debt levels and the impact of tariffs among them – it is one emerging market currency that seems to be shrugging off the wider concerns.

Our concern falls on the Indonesian rupiah, Russian ruble, Turkish lira, South African rand and Mexican peso at the moment given movements in their debt markets in the past few weeks. Holders of these currencies could be in for a tough few weeks if dollar funding remains an issue.

To the comments, Author: Jeremy Cook e64c42cdda509545a9ee0aefaca45a8f (2607:f8b0:4001:c1a::151) To the comments, Author: Jeremy Cook

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