Sterling retakes the lead


With the eyes of investors drawn inexorably to the goings-on in Britain's Parliament it almost did not matter that some of the most important US economic statistics continue to be held up by the government shutdown. The numbers would have had to be spectacular to outshine Monday's instalment of the Brexit Soap Opera. 

A month into the shutdown there remained no sign of compromise between the House and the administration. The effect on Monday was to keep the president away from the World Economic Forum in Davos, Switzerland. Had he been there he would have heard Christine Lagarde, the managing director of the International Monetary Fund, warn that trade tensions "have become intertwined" in financial markets and economic perceptions. She spoke of "significantly higher risks" to the global economy, including America, as a result of the trade war and slowing growth in China.


Euroland ecostats were not exactly plentiful either. In the last 24 hours only the ZEW measures of European investor confidence have emerged to light the way for investors. They were predictably disheartening. In Germany investors were slightly less boot-faced about the outlook, with the measure of Economic Sentiment improving by two and a half points to -15.0, but they were less comfortable with the Current Situation, where the index slumped from 45.3 to 27.6.

Bloomberg came out with an op-ed piece entitled "An Economic Winter Grips the Euro". The up-sum was that weak economic data and lower growth momentum will keep the European Central Bank's benchmark rates at record lows well into 2020 and it closed with the comment that "The economic gloom will weigh on Europe's shared currency." It did not weigh too heavily yesterday though: the EUR was down by just 0.1%.


The Loonie was affected more by a general unease among investors than by any economic update. Oil was down by a scant half-dollar, with all that decline coming in the Far East and Europe this morning. There were no Canadian ecostats.

For the CAD - and indeed for other commodity-related currencies - the two main niggles were trade and the economic outlook. After last week's optimism that Washing and Beijing were on the way to settling their differences, the sense this week is that little progress has actually been achieved. As for the economy, the IMF's estimate is that global growth will be 3.5% this year rather than the 3.7% previously pencilled in. For Canada alone, an expansion of 2.0% has been downgraded to 1.9%. They are not big mark-downs but neither are they steps in the right direction. The CAD is down by 0.3%.


Against all the odds, sterling put behind it Friday's dismal performance and returned to the front of the field. Its recovery seemed to fly in the face of the political evidence. Prime Minister Theresa May presented her Brexit "Plan B" to the House of Commons and it looked suspiciously like the Plan A that had been thoroughly rubbished by Parliament last week. However, despite tough words and ruling out this and that, the sense was that the prime minister is ready to bend to the will of Parliament. And Parliament has plans to prevent, postpone or cancel Brexit. At the very least it intends to prevent a cliff-edge departure from the EU on 29 March. There is no guarantee that Parliament will be successful but investors remain optimistic.

The GBP found further support this morning from the UK jobs data. Unemployment ticked down to 4.0%, its lowest level since 1975, and total wages were up by an annual 3.4%, comfortably ahead of the 2.1% inflation rate. Sterling strengthened by 0.6% on the day.


The general nervousness about trade and growth which worried the commodity currencies was an advantage to the safe-haven yen. It strengthened by 0.2% against the USD.

Other than a 15.2% annual increase in condo sales and a 0.7% decline in supermarket sales there were no Japanese economic statistics to provide guidance but investors will have a little more to look at tonight. As well as the trade figures for December and the All Industry Activity Index, the Bank of Japan will reveal its latest monetary policy decision. Analysts expect no change to monetary policy.

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