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Brexit week number 120 rolls in.

By Hamish Muress

So another big Brexit week rolls in once again, at least we hope it will. What is certain is that the EU Summit will be held this week which run from Wednesday night through till the end of Thursday. However, with negotiations stalling once again over the weekend the pound has already started the week on a weak note and is on the back foot. At the moment there hasn’t been enough progress on the Irish border issue to warrant calling an emergency summit next month. There are rumours that an agreement may not be in place by March and the UK could exit the EU with a ‘no deal’. Recently though Theresa May has been testing the water for possible Labour support in the scenario that a deal is struck with the EU and it needs the approval of Parliament. The theory here is that there will be a number of resignations from the cabinet and Tory rebellions so May could be looking for allies across the aisle.

Moving away from Brexit, Bank of England Chief Economist Andy Haldane announced last week that there is ‘compelling evidence of a new dawn breaking for pay growth’. This is significant because we have the release of wage growth figures tomorrow and secondly, if we begin to see wages vastly outstrip inflation (fingers crossed) then the Bank of England will be moved to increase the rate of interest rate hikes; sterling positive.

What a week last week for US equities, and there’s still been no definitive cause for the big sell offs that we saw. More often than not a trigger isn’t required and the market can be spooked by its own shadow. On Tuesday Apple lost more than $40bn which is the equivalent of Tesla’s entire market cap. For the dollar though the focus still remains December’s anticipated rate hike and for the time being the US dollar has shrugged off any sell off in the equity market. This week we have the release of the latest FOMC minutes (boring) as well as retail sales (exciting) which always have an impact due to the consumer consumption riven nature of the US economy.

Not a good weekend for Angela Merkel. Whilst she wasn’t up to anything in particular her sister party the Christian Social Union suffered big loses in yesterday’s Bavarian state parliament elections. This isn’t good news for Merkel whose party is in coalition with the CSU and Merkel’s torrid year continues. There is no respite for Euro traders today either as Italy is to submit its budget to the European Council. With Italy promising optimistic growth figures for 2019, 2020, and 2021 alongside uncertainties over the ability to cut the budget deficit we anticipate that the European Council could ‘reject’ the budget and ask for a revision. If this is the case, expect derision from Italy’s leaders and calls to regain its sovereignty.

New week, same old story. The Aussie dollar is still one of the instruments that is suffering from the US-China impasse. It isn’t just the current trade war that is a risk to the Australian dollar but the US Treasury is set to release its biannual report on FX manipulation and if they label China as a currency manipulator then watch out for further Aussie woes.

The Canadian dollar had a torrid time last week however there are a couple of events on the horizon that could provide a reprieve for the Loonie most notably the anticipated rate hike at the end of the month. There is also the release of inflation figures and retail sales numbers on Friday but the Bank of Canada is widely anticipated to hike rates to 1.75% a marked increase from the 0.5% rates we saw last July.

Inflation for New Zealand is set to be released late tonight which could be enough to remove any dovish sentiment that may be lingering at the Reserve Bank of New Zealand. The Kiwi had a surprisingly good week and could recover more ground if inflation beats expectations.