Morning Commentary: Priority No. 10

Foreign Exchange - Morning Commentary
Priority No. 10
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Last week, UK Chancellor Sajid Javid surprised the markets by resigning after being pressured to change all of his advisors.  Mr. Javid’s resignation opened the door for the promotion of Rishi Sunak who the markets saw as someone more open to increased fiscal spending.  This then raised the possibility that the UK budget would be delayed to allow for a policy shift such as increased day-to-day spending. 

Ultimately, the UK government has confirmed that the budget will still be released on March 11.  In theory, Sunak could attempt to boost spending within current rules by pushing pension reform and a “mansion tax,” but these measures are very unpopular with the Conservative base.  As such, it appears that the additional fiscal stimulus the markets were hoping for won’t materialize. It should be noted that the government is attempting to move to an autumn budget cycle, raising the possibility that the government could tweak fiscal levers later this year.     

So if No. 10 Downing Street (UK Prime Minister’s office) wasn’t looking to increase fiscal spending in the current budget, why did it push for Sunak to replace Javid?  The relationship between the Treasury and No. 10 has been strained for months.  Likely, Downing Street’s push for Sunak is simply a power grab designed to limit future Treasury resistance.          

Mr. Javid had been resistant to a significant regulatory divergence between the UK and the EU.  Given the very real possibly that UK-EU trade talks will fail to make progress, the move to appoint Sunak (Brexiteer and strong advocate for divergence) could be a strategic move to avoid Treasury’s resistance to a hard Brexit.
  • SARS-CoV-2 virus headlines continue to move markets with overnight news bringing reports of the outbreak accelerating outside of China.  Specifically, South Korea reported another 52 infections.  This report pushed USDKRW to a new five-year high. 
  • China has revised its official case count for the third time this month.  The multiple revisions have eroded confidence in the reported data and raises new questions around the narrative that the outbreak is coming under control.  As expected, commodity-linked currencies such as the Aussie dollar are weaker and safe haven currencies such as the Swiss franc are stronger on this news.  The Japanese yen, another safe haven, is also stronger for the first time in 4 days. 
  • US PMI data missed expectations with manufacturing PMI printing 50.8 against expectations for a 51.5 print and services printing 49.4 against expectations for a 53.4 print.  Services has been a strong point of the US economy but has fallen into contractionary territory with this PMI reading.  The US 30 year yield has fallen to record lows.
  • Better-than-expected Eurozone PMI data has provided some relief for the battered down euro.  Manufacturing PMI beat expectations at 49.1 against expectations for a 47.4 print.  Services PMI also beat at 52.8 against expectations for a 52.3 print.  Notably, German PMI data beat at the manufacturing, services and composite level with the manufacturing number reporting a huge MoM improvement.  Today’s numbers represent a “first read” on the impact of the SARS-CoV-2 virus and suggest limited SARS-CoV-2 impact. This is a surprising result given the large trading relationship that Europe has with China. 
  • UK PMI data came in generally positive.  Manufacturing PMI came in at 51.9 against expectations for a 49.7 print.  This not only beat expectations but moved the series back into expansionary territory.  Services PMI did miss slightly at 53.3 versus expectations for a 53.4 print but remains firmly in expansionary territory.  Composite PMI beat at 53.3 against expectations for a 52.8 print.
  • Canadian retail sales missed expectations, coming in flat against consensus for a 0.1% increase.  However, excluding auto sales, the number beat expectations at 0.5% against expectations for a 0.3% rise.  Overall, this report should not change GDP expectations. 
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