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Black swans a figment of market’s imagination?


If 2016 was the year of shocks, 2017 is becoming the year of predictability. Following on from an utterly foreseeable result in the Dutch election, the French lurch away from the left stopped at the centre. This left the Right-Wing candidate high and dry!


Emmanuel Macron, the thirty-nine-year-old former investment banker, married to his high school teacher, who left the Government less than a year ago to form his own party has swept to power.


Macron received more than 66% of the vote. The turnout was low, as was expected. Macron becomes the first president since the foundation of the modern republic in 1958 from outside one of the two main parties.


The euro shrugged off the news as traders looked forward to next month’s events; the U.K. election and the French National Assembly. One should continue the predictable trend whereas the other, in France is going to be interesting since it is highly unlikely that Macron can win a majority.


The single currency briefly broke the 1.1000 barrier before falling back on a bout of profit taking. The political headwinds that were facing the currency at the start of the year have now largely abated. Brexit is the one “fly in the ointment” and continued wrangling will see short term volatility within established ranges.


MPC meets as inflation report released


The first Bank of England Monetary Policy Committee meeting for a couple of months takes place this Thursday. The outcome of the meeting is beyond doubt. Interest rates will remain at the historically low level of 0.25% and the asset purchase programme is likely to remain at £435bn. although there is room for a reduction.


Kristin Forbes who leaves the committee at the end of June is likely to vote for a hike but will again not be able to garner any support. Inflation cooled a little in March and the effect of a steadier pound hasn’t yet fed through into the data. Governor Mark Carney sees inflation peaking at around 2.7% later in the year. Economists generally see it a little higher at around 3% but with Brexit and the General Election on the horizon a note of caution on monetary policy is likely the most prudent course.


Sterling is holding its own as the Euro gained on the back of Macron’s victory. Eur/Gbp is mired between 0.8420 and 0.8500. Against the dollar, which is reacting to global risk appetite, Sterling is close to the psychologically important 1.3000 area. With major banks calling the General Election a game changer, the pound should be on a trajectory to bite of a further chunk of its fall following the Brexit vote. However recent “buy the rumour sell the fact” reactions have led to bouts of profit taking before the trend is continued.


Dollar on “Back Burner”


Despite the constant threat of a “Trumpism”, the dollar is trading in a narrow range against a basket of its major trading partners currencies.


Against the JPY the dollar has gained close to 4% since making a low of 108.31 in mid-April. The widening of the interest rate differential being a major contributor.


The “dollar index”, for those of you interested is made up of; EUR (57.6%), JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%) and CHF (3.6%).


The makeup of the “basket” has been altered only once, with the advent of the euro at the start of 1999. The “basket” is overdue for revision as China, Mexico, South Korea and Brazil are presently not part of the index despite being major trading partners, whereas Sweden and Switzerland are long overdue for retirement.


100 was its value in March 1973 at its inception. Since then it has traded as high as 167 and as low as 70.


History lesson over.


Global risk appetite has become the major driver of the dollar index. Commodity prices are going through a slump although the release this morning of a significant increase in the Chinese trade surplus belies that image somewhat.


The U.S. is now less reliant on oil imports following the use of shale and Trump’s approval of offshore exploration.


The oil price has fallen back to $ 45 due to a glut of oil on the market and OPEC’s inability to control its members as it once could.

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