Phase One (1)
Towards the end of last week there was excitement on both sides of the Atlantic as the British and American leaders came close to completing Phase One of their respective challenges; Brexit and Sino-US trade. Sterling reacted positively; the US dollar did not.
Closest to home, the Conservative party's overwhelming win in the general election provided an instant boost for sterling. The moment the exit poll result came out at 2200h on Thursday evening the pound jumped three cents higher against the US dollar and two cents higher against the euro. And then it stopped. Broadly, it held steady overnight and faded on Friday.
The lack of follow-through reflected two things. First, although the result did put Johnson in a stronger position to get his withdrawal agreement through Parliament, only the scale of it was a surprise. Second, the withdrawal bill is just phase one of Brexit; the second phase - a trade agreement of unknown hue - has yet to be negotiated. Nevertheless, sterling remains 1.3% above Thursday morning's levels. It is the top performer over the last week, month, three months, six months and year.
Phase One (2)
On Thursday the US administration announced the first phase of a trade deal with China. The agreement fended off the threat of new tariffs which had been scheduled for Sunday. Equity prices pushed higher and the safe-haven Japanese yen was the main casualty on the day.
Other than an immediate upward knee-jerk reaction, news of the deal was not particularly helpful to the obvious beneficiaries; commodity-related currencies which rely heavily on trade with China. The Aussie was in fact the joint-biggest loser - alongside sterling - on Friday.
Despite the US president's tub-thumping enthusiasm ("farmers are going to have to go out and buy much larger tractors"), a considerable number of questions remain about the shape and timing of a comprehensive trade deal. The Aussie's decline on Friday was partly a reflection of those concerns and partly a function of technical resistance at a five month high around US$0.6930.
The economic data on Thursday and Friday paled into insignificance alongside Johnson's election victory and Trump's trade deal. In isolation they might have made a difference but investors had bigger fish to fry. Even Christine Lagarde's first ECB press conference made less difference to EUR/USD than the UK election result.
The European Central Bank president kept alive the possibility of new monetary stimulus but did not sound unduly keen on the idea. She portrayed herself as "neither a dove nor a hawk" but as an owl. To wit; one "that is often associated with a little bit of wisdom".
Today began with some sub-optimal provisional purchasing manager' index readings from Australia. Once again, manufacturing and services were both in the contraction zone below 50. The provisional readings for the UK (which are now established on the monthly calendar) are also likely to be "negative". At teatime the Bank of England will publish its biannual Financial Stability Report and tonight the Reserve Bank of Australia will release the minutes of its last policy meeting.