Wednesday, March 29, 2017

Fed rate-hike outlook boosts U.S. Dollar, Brexit now real

USD
The U.S. Dollar has improved by over half a percent overall since yesterday’s session following positive economic indicators, optimistic commentary from Fed officials, and a surprising call for Scottish Independence. Another surprise on our side of the pond was stellar Consumer Confidence, which registered at its highest level in sixteen years. Market participants seem to have moved past the fiasco over healthcare overhaul, although many remain doubtful over the administration’s ability to negotiate more effectively towards tax reform and higher fiscal expenditures on infrastructure as well as border control.
Now that the United Kingdom has officially started their divorce from the European Union, we will monitor the GBP/USD and EUR/USD pairs closely as this event is indeed unprecedented. Today marks a historic day, but it may go relatively quiet as markets prepare for statements from EU officials and gauge the initial bets placed by traders. We also will hear from Boston Fed President Eric Rosengren at 11:30AM and San Francisco Fed President John Williams at 1:15PM.

GBP
The Pound was moving in tight ranges, but fell slightly as the North American morning began. Across the board, stock exchanges are muted as investors take in the reality of invoking Article 50. As we have explained before, we feel the UK may face tremendous challenges moving forward as the EU will negotiate with a heavy hand in order to not promote or foment any separatist sentiment in any of the 27 nations left as members. This may prove to be a difficult prospect because of a rise in populism in the continent and a wish for independence in Scotland from the crown.  
Since World War II, cooperation between the British and the rest of Europe has been a key factor to maintaining a much desired peace and opportunities flourished commercially with the ease of flow of people and business. For the first time in a long while, disagreement is the modus operandi and we hope that a mutually beneficial relationship can remain. The devil will be in the details.

JPY

The Yen has appreciated by 3.5% since the middle of March, benefiting from the nature of uncertain markets and a quick turn to risk-aversion. The Japanese are trying to push for inflationary growth and the government is working on a stimulus package to rebuild much of its infrastructure, possibly revamp its military capabilities as well. We see the Yen improving if negotiations for Brexit start going sour early and if further mishaps occur in the U.S. as it relates to policymaking. For now, expect dollar to stay afloat on policy divergence and potentially as another safe-haven hedge to European chaos. 

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