Weekly Currency Brief – 3rd Jan – 10th Jan 2017

As you were
January was not even into double figures before sterling had abandoned its new year’s resolutions. Investors clearly cannot stop worrying about it or forget about what happened last year. More worryingly, even though the pound got off to a bright start on 3 January and the three big monthly economic indicators from the UK private sector all exceeded expectations, investors still found it too easy to be negative about the pound.

Prime ministers’ answers
It was the prime minister herself who started the rot during a TV interview on Sunday morning. Theresa May. Three times the interviewer asked “Are you prioritising immigration over access to the single market?” And three time the PM demurred, saying only that she wants to secure “the best possible deal for us”. Rather than muddled thinking on the part off the government, Ms May believes that people who think the country can keep “bits of EU membership” are missing the point that it “would be leaving”.

It was the prime minister herself who kept it going. Germany’s Angela Merkel supported her Downing Street colleague the following day when she insisted that the “four freedoms” – freedoms of movement within the single market for goods, services, capital and people are indivisible. Britain’s negotiations “cannot be based on cherry-picking” which bits they want to abandon and which to keep.

Brexit bites back
So back sterling is to the position it occupied last year. Investors would generally prefer the UK to remain within the single market (the so-called “soft” Brexit) because they know what it entails: British banks still doing deals in Frankfurt and continued demand for Wensleydale cheese in Toulouse. They do not like the idea of a “hard” Brexit because, it is assumed, cross-Channel commerce would become more difficult and expensive.

Faced with two prime-ministerial comments in two days from arguably the two most powerful politicians in Europe, both of them pointing to a hard Brexit, investors saw little option but to sell the pound.

Order of merit
For the year to date which, for the FX market, started on 3 January, the pound is the undisputed loser, down by an average of -2.2% against the other dozen most actively-traded currencies. It has fallen by roughly that proportion against the euro, the Swiss franc, the New Zealand dollar and the Swedish krona. Its biggest loss is to the Australian dollar, where it is down by -3.1%, and its smallest to the US dollar; a cent and a half or -1.2%.

Trump effect fades
In the closing weeks of 2016 investors were inspired by the economic policies sketched out by Mr Trump. They included corporate tax cuts, increased public spending, a relaxation of bank regulation and the repatriation of motor vehicle manufacture. Together they made the dollar the top performing major currency between election day and new year’s eve.

There has been no follow-through into 2017. Investors have bought into Mr Trump’s promises but they now want to see them fleshed out as workable policies before they chase the dollar higher.