Weekly Currency Brief – 17th Jan – 24th Jan 2017

Renaissance
After a fortnight of almost constant retreat sterling has rediscovered its mojo. On the week it is an average of 2.6% stronger against the other dozen most actively-traded currencies. Its smallest gain is of 1.6% against the Norwegian krone: its second biggest is the 3.3% – four whole cents – by which it rose against the US dollar. On average the pound is still lower on the year by -1% and it is down by almost that much against the euro – a cent – but it is a net 1.7% firmer against the US dollar, with more than two cents in the bag.

Winner
Remarkably to some, it was a speech by prime minster Theresa May that lit the pound’s fire. Having been a consistent portent of doom thus far whenever she opened her mouth, her Brexit speech pressed the right buttons, not least because its salient points had been leaked by Downing Street the previous evening. Even though she signalled the “hard” Brexit that investors allegedly feared, with complete withdrawal from all things EU including the single market, a couple of her 12 points went down well and the rest looked at least well-intentioned.

Investors welcomed both her willingness to allow parliament a vote on the terms of the eventual agreement and her aim to secure a transitional period, so as to avoid the cliff-edge of a sudden change in regulations. It remains to be seen whether or not the latter can be achieved but the aim of doing so was heartening to sterling’s supporters.

Loser
The US dollar’s Trump rally had already run out of steam by the time the new president had his inauguration on Friday. His pronouncements since then have served to divert investors’ attention away from the assumed benefits of his policies and towards their potential pitfalls.

Tax cuts and infrastructure spending, together with swingeing import duties, are theoretically positive for the dollar. The first two imply a stronger economy and higher interest rates: the third should result in a narrowing – even a reversal – of the trade deficit. But investors are uncomfortable with the prospect of a trade war, which could have a negative effect on the global economy. Putting America first might give the States a bigger slice of the pie but it would likely be a smaller pie. There is also a degree of nervousness about Mr Trump’s bombast:

Even bigger loser
Canada’s dollar had an even worse week, losing -4.2% to the pound. The Loonie suffered after the Bank of Canada governor said in a statement that “a rate cut remains on the table”.

Innocent spectator
The EU’s role was a mostly passive one. Thursday’s European Central Bank press conference brought nothing new to the party: the bank will continue to print money at least until the end of the year and its ultra-low interest rates are going nowhere. The ECB president acknowledged that Germany would like to see a normalisation of monetary policy but said simply that Berlin must “just be patient”.

Supreme Court news
Downing Street will not be allowed to govern by fiat. The Supreme Court has decreed that both houses of parliament must approve the activation of Article 50, the protocol by which Britain will leave the European Union.

That judgment does not extend to the devolved assemblies. Scotland will have to do whatever Westminster decides, despite having voted 62-38 to remain in the EU. There is therefore an increased risk of a second independence referendum if the SNP takes exception to being forced out of the EUby the English and the Welsh.