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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Budget 2017: What announcements will Philip Hammond make?

What will the first budget after Brexit hold for the economy?

This spring’s Budget - set to be announced on Wednesday 8 March 2017 - will be forced to confront the implications of last June's Brexit vote, along with dealing with issues of reliance on consumer spending, business rates and government borrowing. The government also (quietly) announced on Monday night that it will be asking ministerial departments to outline cuts up to 6 per cent, a potential nod for what’s to come next week.

All these things, along with the fact the Chancellor Philip Hammond is scrapping the spring Budget, meaning this announcement should be an interesting one.

The big story at the moment focuses on borrowing. The Resolution Foundation has predicted that healthier-than-expected tax revenues and the lack of a Brexit effect so far will lower Budget borrowing forecasts by £29bn between 2015-16 and 2020-21. 

The FT reports a possible £3bn reduction in borrowing, to £67bn. They also pin this optimistic prediction to higher-than-average self-assessment tax receipts, after changes in the taxation of dividends.

The Chancellor will potentially stick to the three key changes he made from George Osborne’s former financial commitments, according to The Sun. These consist of not predicting a surplus in 2019/20, slightly relieving the cap on welfare spending and no longer committing to reducing debt. The paper also predicts he’ll announce a change to the controversial business rates that were recently released, that could leave “shopkeepers and publicans clobbered with tax hikes of up to 400 per cent".

What do we know for sure?

The government has announced a few key changes in in advance of the Budget.

  1. The Spring Budget 2017 will be the final Budget held during springtime
  2. Finance Bill will follow the Budget, as it does now
  3. From 2018 "Legislation day" will move to the summer
  4. An Autumn Budget means tax changes will be announced well in advance of the start of the tax year
  5. 2018 will see the first Spring Statement