Brexit: The Paradoxical Pound

Brexit: The Paradoxical Pound

The British pound seemed to enjoy the current impasse; Italy considered joining China's Belt and Road Initiative on commerce and infrastructure; U.S. economic data was less than encouraging; China and the U.S. agreed to continue agreeing.


“I have to ration [bullets]. It’s getting too hard to keep up.”
Street gang member in Caracas, Venezuela

Brexit: The Paradoxical Pound

The UK House of Commons voted on Thursday against the prospect of a “no deal” Brexit; another vote is scheduled for Tuesday, March 19 on empowering Prime Minister May to formally request from the European Union (EU) a delay in the onset of Brexit on March 29, just under two weeks away.

Against that deadline, May continues to vigorously lobby for support from pro-Brexit members of parties as well as her coalition partners, Northern Ireland's Democratic Unionist Party.

Paradoxically, the currency markets appear to view the last-minute rush as a positive reduction in uncertainty, despite the underlying issues – especially the UK-Irish border "backstop" – remaining unresolved.  So far this year, the British pound is the strongest major currency against the U.S. dollar, up some 3.8%[1] since the end of 2018, and spiking from the previous day’s low of $1.3005 to $1.338 to the dollar immediately after the Commons vote to reject the prospect of a no-deal Brexit.  

EU leaders have sent mixed signals about their willingness to extend the deadline, especially with no visible prospect of a resolution on the "backstop”; recent optimism about the British pound has puzzled some observers.

Italy: China Lends a Hand

Italy's government is considering becoming the first G7 country to join China's wide-ranging "Belt and Road" (BRI) global development program.

Unlike the BRI projects in Asia and Africa, which borrow directly from China's internal infrastructure banks, borrowing for the program would come from the China-led multilateral Asian Infrastructure Investment Bank (AIIB). That could make Italy's joint proposal more palatable to the EU, since AIIB projects are open to multilateral bids from non-Chinese contractors, unlike China's domestic infrastructure banks, which rely on Chinese labor – a sore point for  pro-union parties within Italy's most recent coalition government. Progress on these agreements would be welcome to both countries – especially if Memoranda of Understanding could be ready for signing during President Xi Jinping's visit to Rome on March 22.

U.S. Economy: Softening Data

February's industrial production figures disappointed slightly; manufacturing production also fell short, down for the second month in a row at -0.5% for February and a revised ‑0.5% for January. Capacity utilization also fell short of expectations at 78.2%, down slightly from revised figures for January.  But the largest downside surprise was in the New York Fed's regional manufacturing gauge for March, which fell to its lowest level since May 2017– though remaining in positive territory since crossing over to the plus side in November 2016.

Positive findings were modest at best: the job openings report for January was slightly stronger than expected, and March consumer sentiment beat expectations slightly – though the sentiment survey, conducted by the University of Michigan, also showed a post-recession average low of 15.5% chance of losing a job they or their spouse would want to keep.

China: Agreeing to Agree

The recent delay in the U.S. imposition of additional tariffs on exports from China accompanied an agreement on currency policy and allowed for further talks. Both parties agreed that any meeting between Presidents Trump and President Xi to sign agreements will take place no earlier than April.

Indications of progress could be found in China's recently concluded National People's Congress, during which legislation was passed eliminating the requirement for foreign enterprises to transfer proprietary technology to joint-venture partners and protect against "illegal government interference". Chinese Premier Li Keqiang described accompanying enforcement measures as "ensur[ing] violators have no place to hide". On the U.S. side, President Trump added "We are getting what we have to get" and voiced his personal expectations that negotiations should wrap up within four weeks.

 


All data Source: Bloomberg, March 15, 2019 unless otherwise indicated.

1 Source Bloomberg, March 15, 2019, 8:30 AM ET

 

Definition:

G7 refers to Canada, France, Germany, Italy, Japan, United Kingdom, and United States.

 

 

[1] Source Bloomberg, March 15, 2019, 8:30 AM ET
[1] Source Bloomberg, March 15, 2019, 8:30 AM ET
[1] Source Bloomberg, March 15, 2019, 8:30 AM ET
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