The Washington impasse may lead to further Euro strength

In an epic reversal of fortunes, the Eurozone is starting to look like a safe haven to some.

It’s been a pretty quiet year in the major currency markets. Euro vs the USD is the most actively traded currency pair in the 5 trillion USD a day market, and this year its range has been pretty muted, with a high on 1 February of 1.3711 and a low of 1.2746 on 4 April. As I write, on 21 October, the current price is 1.3680, so only a hair’s breadth away from the year’s highs.

The USD was already suffering as a result of the Fed’s "no-taper" shocker in September and we know what China felt about Washington’s stand-off and brinkmanship with the debt ceiling; last week saw China’s ex-deputy head of FX regulation opining that China should cut its holdings of US Treasuries in the medium to long term and the ECB’s Nowotny chipping in to say that the Euro will play an increasing role as a reserve currency.

The dollar’s trouble is that it now seems highly unlikely that the Fed will stop printing money in the near future. The messy denouement of the Washington show means that we will now be subject to another four or maybe even six months of rather unsettling uncertainty.

Although Congress has extended to debt limit to 7 February, the US Treasury could then start to use "extraordinary" accounting measures to live from hand-to-mouth for a few more weeks, as it started doing this year in May, finding some USD 300bn tucked away to prolong the real debt limit deadline to 17 October (ish). The seasonal shape of US Treasury receipts and payments suggests it will only take a couple of months or so to use up USD 300bn this time, only getting them through to April.

This is neither "nowt nor summat", as we say in Yorkshire. It’s not a short enough time for consumers, corporations and the Fed to feel this is all going to be behind us soon, and it’s not far enough away for everyone to think "whatever, I’ll forget about Washington for a year", say. It’s just about the worst timescale one can imagine.

Consumers will put off purchases, employers will hesitate to hire - in both cases probably not catastrophically, but enough to take the edge off growth - 0.5 per cent in Q4 2013 and Q1 2014. More importantly for the dollar’s fortunes the Fed now seems highly unlikely to taper before its March meeting, and there must even be some doubt over that now.

The Fed’s key data points are going to be unreliable. We’re now going to see September’s employment report on 22 October, but the market’s reaction function will be heavily skewed: if the numbers are weak, then they’ll be taken to presage an economic dip, if they’re strong they’ll be discounted as dating from before Washington’s antics. The next employment report, for October, will now come out on 8 November and the "household survey" used to calculate the unemployment rate will have to conducted retrospectively - so that will be tainted, and also subject to the same interpretation bias. This all means it’ll be January before the Fed might feel it has "clean" jobs data to analyse.

In an epic reversal of fortunes, the shutdown/debt ceiling debate has given even the Euro some semblance of safe-haven status and thrown into stark relief the contrast between the philosophies of the Fed and the ECB.

With the OMT still doing its job as a virtual sticking plaster, and a Grand Coalition in the making in Germany, there seems little reason why EUR/USD can’t climb towards 1.40 or above before Christmas. That in turn will make the ECB very uneasy, as the Eurozone is flirting with deflation, so a rate cut and/or another LTRO seems very likely-probably at the December meeting.

US Federal Reserve Chairman Ben Bernanke reads the FT during the annual World Bank - IMF meetings in Washington, DC. Photograph: Jim Watson/Getty Images.

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

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Voters are turning against Brexit but the Lib Dems aren't benefiting

Labour's pro-Brexit stance is not preventing it from winning the support of Remainers. Will that change?

More than a year after the UK voted for Brexit, there has been little sign of buyer's remorse. The public, including around a third of Remainers, are largely of the view that the government should "get on with it".

But as real wages are squeezed (owing to the Brexit-linked inflationary spike) there are tentative signs that the mood is changing. In the event of a second referendum, an Opinium/Observer poll found, 47 per cent would vote Remain, compared to 44 per cent for Leave. Support for a repeat vote is also increasing. Forty one per cent of the public now favour a second referendum (with 48 per cent opposed), compared to 33 per cent last December. 

The Liberal Democrats have made halting Brexit their raison d'être. But as public opinion turns, there is no sign they are benefiting. Since the election, Vince Cable's party has yet to exceed single figures in the polls, scoring a lowly 6 per cent in the Opinium survey (down from 7.4 per cent at the election). 

What accounts for this disparity? After their near-extinction in 2015, the Lib Dems remain either toxic or irrelevant to many voters. Labour, by contrast, despite its pro-Brexit stance, has hoovered up Remainers (55 per cent back Jeremy Corbyn's party). 

In some cases, this reflects voters' other priorities. Remainers are prepared to support Labour on account of the party's stances on austerity, housing and education. Corbyn, meanwhile, is a eurosceptic whose internationalism and pro-migration reputation endear him to EU supporters. Other Remainers rewarded Labour MPs who voted against Article 50, rebelling against the leadership's stance. 

But the trend also partly reflects ignorance. By saying little on the subject of Brexit, Corbyn and Labour allowed Remainers to assume the best. Though there is little evidence that voters will abandon Corbyn over his EU stance, the potential exists.

For this reason, the proposal of a new party will continue to recur. By challenging Labour over Brexit, without the toxicity of Lib Dems, it would sharpen the choice before voters. Though it would not win an election, a new party could force Corbyn to soften his stance on Brexit or to offer a second referendum (mirroring Ukip's effect on the Conservatives).

The greatest problem for the project is that it lacks support where it counts: among MPs. For reasons of tribalism and strategy, there is no emergent "Gang of Four" ready to helm a new party. In the absence of a new convulsion, the UK may turn against Brexit without the anti-Brexiteers benefiting. 

George Eaton is political editor of the New Statesman.