Weekly Currency Brief – 8th Feb – 14th Feb 2017

Olive branches all round
As the world’s most unpredictable leader was test-firing a ballistic missile from Pyongyang its second most unpredictable was exuding unusual bonhomie. Donald Trump informed Chinese president Xi Jinping on the phone that the United States does, after all, respect the “one China” policy which maintains the pretence that Taiwan is part of the people’s republic. The following day Mr Trump played golf with Japanese prime minister Shinzo Abe and shook him warmly by the hand for several minutes.

Investors were relieved to find that Mr Trump can, after all, be nice when he tries. The knowledge contributed to an above-average week for the US dollar and it added a cent against the euro. The other plus-point for the dollar was Mr Trump’s promise that there would be a “phenomenal” announcement about tax in the next couple of weeks.

Less worse
After the EU referendum last June the economic world and his wife hurried to publish pessimistic assessments of how the UK economy would suffer. When the sky did not, after all fall down, a queue began to form of institutions wishing to update and upgrade their predictions. The latest of these is from the European Commission, who have changed 1.0% growth for 2017 into 1.5%.

Monetary Policy Committee member Kristin Forbes gave sterling another helping hand. She said in a speech that “if the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in Bank Rate”. It was the “soon” bit that energised investors and the pound.

And the winner is…
Well, actually, the week’s winner was the South African rand but it only beat sterling by 0.2%; a neck, if you like. Otherwise it was a splendid week for the pound, which strengthened by an average of 1.3% against the other dozen most actively-traded currencies. Its gains included four fifths of a US cent, one and three quarter euro cents and two Swiss cents.

The pound’s biggest gain was against the New Zealand dollar, where it was up by five cents or 3%. The Kiwi’s main problem was the Reserve Bank of New Zealand. Investors had been expecting it to hint at higher NZ interest rates but the hint was not forthcoming so they went into a sulk.

Fedspeak
On Tuesday and Wednesday Federal Reserve chairperson Janet Yellen will be answering questions in Congress. Those questions will inevitably relate to the new administration and its likely effects on the economy and monetary policy.

Ms Yellen will be unable to answer such questions because, it must be presumed, she is not privy to the meanderings of the presidential mind. She will have to say something, though, and her speculations will be important to the US dollar.