Weekly Currency Brief – 25th Jul – 1st Aug 2017

Miscommunication
To lose one director of communications may be regarded as a misfortune; to lose two in ten days looks like carelessness. The high rate – and the high profile – of staff turnover at the White House underlines the misgivings of investors about the ability of the Trump administration to get things done. It was also instructive that the Republican Senate rejected for a fourth time the Trumpcare health bill called for by the Republican president.

The government and the administration in Washington are not working together and investors are ever more convinced that the incohesion will put paid to the prospect of any early progress with the tax cuts and investment upon which they had pinned their hopes for the dollar six months ago. The result has been another bad week for the US dollar. It is down by two cents against sterling and has lost a proportionally-similar cent and two thirds to the euro.

Less overvalued
For as long as anyone can remember the Swiss National Bank has complained that the franc is overvalued. The Economist newspaper’s Big Mac Index, which compares the price of the eponymous burger in cities around the world, found that the US item cost US$5.30 in July while the Swiss version came in at the equivalent of US$6.74. The (admittedly simplistic) implication is that the Swiss franc is overvalued by 27%.

At the end of July it began to look as though the market had begun to correct this imbalance. The franc was last week’s weakest performer, falling by -3.6% against the pound and the euro. With the euro zone economy gathering speed, the European Central Bank girding its loins for a wind-down of its asset purchase programme and the peripheral Club Med countries beginning to show some semblance of fiscal normality the need for a safe local alternative to the euro is no longer so pressing.

Respite for the pound
With parliament in recession and the prime minister on holiday sterling had a gentle ride. The Brexit commentary from Westminster was fairly even-handed. Chancellor Philip Hammond said there will be a transitional period when Britain leaves the EU, during which the country will remain a member of the customs union and the single market and freedom of movement will continue. Trade Secretary Liam Fox said there won’t.

Investors have not been reading too much into the banter, given that no decision is likely to be agreed until well after the cabinet reconvenes following the summer holidays. Theresa May is expected to make a speech in September, setting out the government’s plans. Until then investors are likely to give sterling the benefit of the doubt (though, with the pound, such a thing can never be assumed…).