We’re only halfway through the trading week, and there have already been lots of happenings, with probably more to come, since the upcoming RBNZ statement and the Scottish Parliament vote to support another Scottish referendum are coming up. And if you somehow missed these happenings, then here are the most important ones that you need to know about.
Brexit Saga: Act II Will Begin Shortly
And this week (Monday to be exact), Theresa May’s spokesman, James Slack, announced that Theresa May’s government will be triggering Article 50 of the TEU on Wednesday next week (March 29). Not only that, Slack also said that the office of European Council President Donald Tusk has been informed about Theresa May’s plan. And this was confirmed when European Commission spokesman Margaritis Schinas told the media that the E.U. is “ready to begin negotiations.”
Starting the actual Brexit process is both inevitable and widely expected, but the pound still got kicked lower because of the announcement.
Luckily for pound bulls, something else came along that swept the Brexit blues away (for now).
U.K. CPI Exceeds Expectations
As I pointed out in last week’s write-up for the BOE Statement, the pound got charged by bulls when Kristin Forbes unexpectedly voted for a rate hike while “some” of her peers showed their hawkish feathers because “it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted.”
Well, that part about “futher upside news” on inflation apparently painted a very large target mark on the U.K.’s inflation report. And as it turns out, headline CPI increased by 0.7% month-on-month in February, which is the fastest monthly increase since April 2013.
More importantly, the year-on-year reading came in at 2.3%, which is much faster than the +2.1% consensus and marks the fourth consecutive month of ever faster year-on-year readings.
Not only that, February’s annual reading is the best reading since September 2013. Moreover, the reading is already several ticks above the BOE’s 2.0% target, as well as within the upper bounds of the BOE’s staff forecast for February.
And for reference, the BOE’s staff forecasted CPI to increase between 1.9% and 2.3%, with 2.1% being the median, according to the BOE’s February Inflation Report.
Anyhow, this pleasantly surprising reading very likely fueled expectations that the BOE may be hiking soon, sending the pound surging higher.
First French Presidential Debate Goes to … Macron
The first French Presidential debate was over three hours long and my French ain’t exactly up to scratch, so I won’t be going into the details on what the Presidential contenders were contending about.
What I would be focusing on, however, is what the market wanted to see, which is who was seen as the winner of the debate.
For example, when Elabe asked the 1,157 respondents who was the most convincing, 29% voted for Macron while only 19% voted for Le Pen.
And when Elabe asked who had the best vision for France and who was the most qualified to be president, Macron came out on top again, with 30% and 31% respectively. Le Pen, meanwhile, got 19% and 17% respectively.
Macron’s rather large margin of victory in the debate (and Le Pen’s relatively poor performance) was taken as a sign that the anti-EU Front National’s Marine Le Pen will likely lose in the elections, thereby preserving the status quo and ensuring France’s continued membership in the European Union. And euro bulls obviously liked that.
Growing Doubts on Trump’s Fiscal Plans
And remember, U.S. equities have been rallying partly because of optimism over Trump’s fiscal stimulus plans, mainly his tax cut plans. In addition, commodities have been pushed higher because of speculation that Trump’s planned trillion-dollar infrastructure program would fuel demand for commodities, particularly basic materials like industrial metals.
Anyhow, market analysts say that the market views the upcoming vote on the repeal of Obamacare this Thursday, and the very real possibility that Trump will lose, as a test of Trump’s influence over his own Party.
And worries and jitters over this supposed test were apparently the main drivers for the market’s behavior yesterday, when equities slumped, commodities tanked, and bond yields plunged due to safe-haven demand for bonds. In short, risk aversion total domination. And the market’s behavior today (March 22) appears to be a repeat performance of yesterday’s price action.
As to how this version of the Trump Effect is affecting the forex market, well, just look at your charts and you can see that the higher-yielding Aussie and Kiwi got pulled down by the commodities rout and the overall risk aversion. The Greenback, meanwhile, was prevented from recovering after last week’s slump in the wake of the FOMC statement.
As for the Swissy and the yen, they’re getting a lot of safe-haven love, as jittery traders load up on the safe-havens. The yen, in particular, is currently on course to be this week’s champ, probably because bond yields plunged, easing bearish pressure on the yen.