Labor Day Early for Rest of World as the "Buck" Struggles

 

USD

The U.S. Dollar is mostly down this morning following a quiet session overnight as a result of Labor Day celebrations globally. Last week’s busy schedule did not end up aiding the dollar, which fell by almost half a percent overall per the Bloomberg Dollar Spot Index. Markets flourished momentarily and reached new yearly and record highs after the administration revealed a very brief plan for tackling tax reform. The lack of clarity of implementation and details slowed down the momentum once again. We believe that inconsistency after the first 100 days has started to weigh on the buck, in addition to dwindling economic indicators, as revealed by the GDP figures from last Friday.

Today was more of the same weakening trend. Personal Income and Spending fell below expectations, while Personal Consumption Expenditures came right in line with estimates, contracting by 0.1% in comparison to last month. The Fed’s preferred measure of inflation staying the same isn’t problematic, but the slowdown in consumption is concerning if the Fed is indeed planning to hike midway through the year. Congress says to have a deal when it comes to passing a budget with no “beautiful’ wall, but certainly a heavy injection to defense spending.

 

EUR 

The Euro is much improved starting May having appreciated by over 3.0% throughout April. The fears of anti-establishment Marine Le Pen succeeding in the French election faded after seeing Emmanuel Macron, a centrist and enthusiastic globalist, win the first round.

The second round of voting will occur this Sunday, so next week we will know if France heads towards separatism under Le Pen or embraces the EU even more with Macron. We believe the race shall be close and considering the surprise events of last year, polling may not be telling the entire story and 20.0% advantage for Macron seems unrealistic.

Investors and traders will eventually come to focus on something other than election risk, though Germany’s will be important later on, as Brexit negotiations take shape. On Saturday, then 27-nation bloc agreed to have a united stance that represents obstacles for UK Prime Minister Theresa May’s vision of a trade deal prior to the divorce, which like any other separation requires financial retributions. It won’t be pretty.

 

GBP 

The Pound also mounted a tremendous comeback against the greenback in April, climbing 4.4% in value as the month presented PM Theresa May with opportunities to solidify her leadership, a necessary step to avoid domestic grievances with Brexit talks. The UK position is cemented per the head of state, hoping to work on establishing a new trade agreement while delaying the responsibilities of dealing with the mobility of people and financial regulations.

Nevertheless, we see some trouble ahead as German Chancellor Angela Merkel began commenting on how the Brits need to scale back their expectations to get everything their way. On a very basic line of thinking, the Brexit and referendum that led to it are not developments that merit a reward. With a slowdown economically and the threat of international companies leaving London, we predict the Pound will not stay in these ranges long-term.