UK Court Ruling Adds to Brexit Challenges

Daily Analysis - 25/01/2017

Parliamentary Approval in Both Houses Required for UK to Trigger Article 50


Although the government had already predicted that the Supreme Court would not be ruling in their favor regarding the need for a parliamentary vote on triggering Article 50 to begin exit negotiations, the latest ruling indicates that the path to leaving the European Union will be more complicated than previously anticipated.

Supreme Court Ruling Sets Stage for Parliamentary Showdown

In another setback for Brexit negotiations, the UK Supreme Court has issued a judgement requiring both the House of Commons and House of Lords to approve triggering Article 50 of the Lisbon Treaty.  Although Prime Minister Theresa May mentioned this likelihood a week earlier during her speech, this development could add another obstacle to beginning exit negotiations during the end of March as planned.

While many parliamentarians belonging to the House of Commons have indicated that they will reflect the will of the people and respect the referendum results, the House of Lords has made its reservations widely known.  Nevertheless, any move against “Brexit” could conceivably catalyze a constitutional crisis, making the likelihood of disapproval very small.  After a brief downtick, the Pound continues to gain ground versus the Euro, extending gains for a third straight session.


Japanese Exports Rise for First Time in Over a Year

Exports climbed 5.40% year over year through the end of December, smashing the consensus market estimate and suggesting that broad based gains from a weaker Yen are being felt across the economy.

The better than expected figure also marked the first time that annualized exports rose in 15-months, indicating even better traction than previously estimated, especially following a jump in sales to China and rebounding global trade.  While imports showed a vast improvement over the prior month’s reading of an -8.80% contraction, the figure nevertheless missed estimates, printing at -2.60% year over year versus expectations of a -0.80% decline.  As a result of the surge in exports, the trade surplus remained intact during the period, reading at JPY 360 billion.  After bouncing back from support on Tuesday, USDJPY is back under pressure, testing 113.50.


Turkish Central Bank Disappoints

With confidence in the economic outlook for Turkey quickly fading, the latest decision by the Turkish Central Bank to leave rates unchanged ignores several important developments.  With inflation climbing, unemployment on the rise, and GDP contracting, the move highlights the ongoing hurdles facing policymakers as they work to respect President Erdogan’s sentiment.  Erdogan has called for actually lowering interest rates to make borrowing more accessible.

However, the losses in the Lira are causing inflation to climb well past desired levels, creating new headaches as the Central Bank works to steer the economy.  Although the lending rate was raised, failure to increase the key rate to tackle inflation is effectively destroying investor confidence in the institutions independence.  With no movement on rates expected until the situation becomes too dire, the Lira continues to give ground versus peers, extending Tuesday’s losses against the Euro.


Australian Consumer Price Growth Misses Estimates

Both the quarterly and annualized consumer inflation figures from Australia failed to meet forecasts during the latest reading.  The quarterly number arrived at 0.50% versus 0.70% whereas the annualized figure managed to beat the prior reading, printing at 1.50% despite missing estimates of 1.60% price growth.

Although annualized CPI rose to the highest point since the fourth quarter of 2015, the data highlights the ongoing struggles facing Central Bank officials as they work to bring inflation back up to the 2.00% to 3.00% targeted.  Furthermore, it could be a sign that further accommodation from the Reserve Bank of Australia will be forthcoming, especially if growth and employment fall further.  Following the release, the Australian dollar has found itself under renewed pressure, falling over 50 pips against the US dollar from intraday highs.


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