Pound Plunges on Hard Brexit Hints

Daily Analysis - 16/01/2017

UK Allegedly Planning a Clean Break from European Union

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With an abundance of rumors swirling ahead of UK Prime Minister Theresa May’s speech on Tuesday, recent comments from policymakers has increased a sense of nervousness amongst market participants.  The rising possibility of a hard exit from the single market has unnerved traders, sending the Pound to the lowest point against the dollar in months as risks of a disorderly exodus climb.

Pound Reaches Lowest Since September


The approaching trigger date for leaving the European Union has seen the United Kingdom once again return to the forefront of the news as hints from key government officials point towards a hard exit from the EU.  Remarks by Finance Chief Phillip Hammond stressed this point when he indicated that while a hard Brexit could result in a short-term correction, the goal remained to retake sovereignty, leave the European Court of Justice, and reassert control over borders and immigration.

Prime Minister Theresa May is scheduled to speak on Tuesday, unveiling greater detail about the country’s negotiating platform and strategic planning for the eventual outcome of the exit and what it will mean for business.  In the meantime, the Pound has slipped to the lowest point against the US dollar since the crash in October, briefly falling below 1.2000 before rising back above the level.

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Turkish Unemployment Hits Multi-Year High


In another sign of the challenges facing Turkey ahead of the planned sovereign rating assessment to be conducted by Fitch Ratings later in the month, the latest unemployment figures underscore the challenges facing economic activity.  Unemployment rose to 11.80% in October from 11.30% in September, marking the highest jobless rate since March of 2010 as policymakers struggle to reverse the decline in growth.

A continued deterioration in employment combined with the high inflation that has resulted from the losses in the Lira could make any recovery in fundamentals even more challenging.  Considering President Erdogan has threatened the Central Bank should it raise interest rates, the ongoing slide in the Lira is unlikely to abate any time soon, with the currency once giving ground after appreciating for two straight sessions.

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Japanese PPI Deflation Ebbs


The tremendous reversal in the Yen over the last few months has helped lead to some unsurprising gains for the Japanese economy, specifically in the form of producer price inflation.  According to figures reported overnight by the Bank of Japan, headline producer prices contracted by -1.20% on an annualized basis, marking the lowest pace of price declines in nearly 2-years after 21-straight months of producer price deflation.

The main drivers behind this better than anticipated inflation reading was the rebound in energy costs as prices for oil and coal bounced back alongside nonferrous metals.  Otherwise, chemicals remained a drag on the aggregate figure in spite of falling at a reduced pace.  Nevertheless, the positive data has only seen the Yen extend its recent appreciation versus the US dollar, with USDJPY now down for 6-straight sessions.

 

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Haven Asset Bidding Sees Gold Hit 7-Week High


Alongside the rebound in the Yen, a broad-based selloff in the US dollar has seen haven assets once again bid higher, with precious metals and other haven currencies benefiting from the souring global outlook.  Weaker trade fundamentals, concerns about Chinese outflows, and now the raised prospect of a disorderly British exit from the European Union are all conspiring to drive risk premium higher on a worldwide basis.

Not helping matters has been the persistent pressure on the US dollar which has resulted in greater demand for alternatives.  The result has pushed gold towards the highest point since November even though a planned period of monetary policy tightening could reverse those gains to a degree.  However, should the dollar selloff continue in the absence of fundamental data this holiday session, gold prices could take another run at the upside over the near-term.

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