So far so good

Proud pound

The US dollar led the way over the weekend but only just: it beat the British pound by an insignificant dozen ticks. Over the last week and month the strongest performer has been sterling. Yes, sterling, and by a goodly margin.

Investors don't want the Japanese yen because its interest rates are too low. They don't want the euro because they have become fearful about populist nationalism in Europe. They don't want the South African rand - or any other emerging market currency for that matter - because they are fearful for the effect of future US trade protectionism. They are wary of the Commonwealth dollars for the same reason. 

And yet, impossibly, they have taken a shine to the British pound, the currency they walloped mercilessly for four months following the EU referendum. In the last week sterling's gains average 3.4% against the other dozen most actively-traded currencies. Over the last month that average is 4.7%. The pound was already showing signs of recovery before the US election and and the emergence of President-elect Trump has provided a welcome distraction from Brexit.

Curious dollar

Although the dollar was the second-strongest performer in the last week its outlook into the new presidency is far from certain. It is clear from its recent rise that investors are inclined to see more upside than downside but there are risks to both outcomes.

The bulls reckon tax breaks for corporations could result in the repatriation of up to $2tr of profits currently held abroad. Dollar purchases on such a scale would on their own take the dollar higher.  Tax cuts on a broader scale would be positive for inflation and, therefore, for interest rates and the dollar. The bears argue that trade barriers and tariffs, the beautiful wall/fence on the Mexican border and the expulsion of 3m illegal residents would be economically damaging.

Problem is, the future administration's policy is fluid. It changes on a daily basis. On balance investors like what they see at the moment but that is not to say they will see it the same way in a week's or a month's time. With the appointment of more cabinet secretaries policy should become more solid and stable but in the meantime there will be nagging thoughts of "now what?".

Almost normal service

The paucity of economic data last Thursday and Friday will continue today. China and Japan have already released their numbers and there is nothing of any consequence on the London agenda.

Chinese retail sales were up by an annual 10.0% and industrial production rose by 6.1%. Both figures fell short of expectations. Japan's gross domestic product expanded by a provisional 0.5% in the third quarter, more than double the growth forecast by analysts. 

Swiss producer prices, Italian and Greek consumer prices and euro zone industrial production come out this morning and New Zealand retail sales tonight. The European Central Bank president will be speaking in Rome this afternoon.