Suits not stats
Politics overshadowed the economic statistics for much of the week. In the United States, Britain, South Africa and, to an extent, the euro zone investors paid more attention to governments and votes than they did to the data that traditionally steer exchange rate movements. Sterling’s course was shaped mainly by investors’ perception of the Brexit negotiations as their mood swung between anticipation and anticlimax.
The pound was unchanged against the euro and added a third of a US cent while losing ground to the Swiss franc and the Japanese yen. Canada’s dollar was the weakest of the bunch, losing three quarters of a cent to sterling, and the South African rand was the unequivocal victor, strengthening by 6% to a three-month high.
Tax compromise
At a special election in Alabama last Tuesday the Republicans lost one of their seats to the Democrats. The effect will be to reduce the Republican majority in the Senate to 51-49. Because the incoming Democrat senator will not take his seat until the New Year, the Republicans have been hurrying their tax cut legislation through Congress in order to avoid possible defeat. A final vote takes place this week and the legislation is expected to pass.
The prospect of major corporate tax cuts has been seen as a positive for the dollar in the last couple of months. It remains to be seen whether or not that will still be the case when the legislation becomes effective. Investors may choose to focus instead on the widening budget deficit implicit in the reduced tax revenues.
The Brexit beat
A couple of weeks ago it seemed that, if Britain were able to reach an agreement with the EU on the Brexit divorce bill, all would be well with the world. At the end of November the deal was sealed, and the pound is indeed stronger on most fronts today than it was before. Its net gains since then include half a US cent and one and a half euro cents.
But that does not mean sterling is having an easy life at the moment. For every “breakthrough” there is an attendant anticlimax. Last Friday, for example, the pound looked perky as the European Council gave its approval to the commencement of trade talks. Then on Monday the EU warned that those talks might not begin until March and there would be no question of any special deal to accommodate the needs of Britain’s financial sector.
For every two steps forward there is one to the rear. Many economists argue that the pound is unjustifiably weak. Plenty of investors agree, in theory, but that does not mean they are queuing up to buy sterling. They are concerned that it is not a matter of if, but of when the next setback will come.
Market liquidity between now and the beginning of January will be reduced as investors clean house for the year-end and do their best to avoid getting sucked into activity they would rather avoid. That lack of depth can lead to disproportionately big currency moves resulting from relatively small orders.
A four-day weekend is coming up and, with it, a sporting chance of bagging an extra three days off to create a ten-day break. Have a great Christmas and all the best for 2018!
Sarah, Senior Account Manager at Moneycorp
Moneycorp is one of the largest international payment companies supporting over 90 currencies. Last year Moneycorp traded over £22.6 billion worth of international money transfers. Find out how Moneycorp can help you with your international transfer here.
