Where do I even begin this week’s report!? We have suspected Russian involvement in the poisoning of a former spy, his daughter, a policeman and other members of the British public, just before an apparent 76% percent victory for Russia’s long serving President (and occasional Prime Minister). This is amid multiple claims of ballot fraud and irregularities from the independent election monitoring group Golos and others, but no one seems to take much notice. We have also had a revolving door to the HR department at the Whitehouse and amidst all of that the UK actually agreed with the EU on the Brexit transition period, triggering a reasonably dramatic increase in the value of GBP against both EUR and USD.
I am going to format the report slightly differently:
Question: Have you ever heard of a political risk gauge called the Geopolitical Risk Index (GPR Index)?
Answer: It is a tool that helps to make some sense of the “Not Normal” that is going on around us and is often cited by policy-makers, investors, and media as one of the key determinants of economic decisions. The GPR Index is a unit of measure to indicate the frequency of articles from leading media outlets (mostly newspapers) discussing increased tension between states, wars, terrorism and other negative events.
High GPR induces adverse effects on US employment and trade, a drop in US stock market, a decline in real activity and stock prices in other advanced economies. It brings about capital outflows from emerging economies to safe havens. Recent peaks in the GPR Index have included Isis escalation in 2014, the Paris attacks in 2015 and raised tensions due to the nuclear threat posed by North Korea in 2017. Last week the GPR Index hit its highest point since the 2003 invasion of Iraq.
This is Saxo Bank’s representation of the GPR Index, published by Ole Hansen:
I realise by now that you may be wondering what has any of this got to do with relative currency values and what you need to know in order to better time your trades and mitigate your currency risk exposure. We are getting there. Its all about who carries the most risk and how that transfers to relative value. What has caused the spike in the GPR Index last week?
The threat of trade war.
Trade war brings huge political uncertainty and has been Trump’s favourite topic of conversation, besides seemingly shouting “You’re fired!” at almost everyone except his daughter Ivanka. Several strategists have made the case that the asset bearing the brunt of political uncertainty, not to mention the implications of a full-blown trade war sparked by tariffs on steel and aluminium imports, is the USD. U.S. stocks enjoyed a stellar year whilst the USD, as measured by the ICE USD Index, lost 10% of its value gauged against a half-dozen rivals, including the EUR and JPY.
Could this now be prescribing USD weakness and continued decline in the coming months?
We never profess to have a crystal ball but certainly there might be a significant argument for looking at mitigating further downside risk to USD exposure.
GBP/USD movement can be seen on the graph below:
After yesterday’s pleasant surprise for GBP value increase against the EUR, Thursday will be the next main event with the EU Summit taking place. The leaders of the European Union convene to discuss various matters and Brexit leads the agenda. Will they make progress on trade, the rights of citizens, and the Irish border? Finalizing the transition deal is the key event and Ireland is high on the agenda. The UK wants to be out of the Customs Union but with no customs checks between the Republic of Ireland and Northern Ireland. This circle will be hard to square. A breakup of talks could weigh on the GBP.
On Friday we will receive the Bank of England Quarterly Bulletin. This is, frankly, likely to move the markets. Clients wanting to take advantage of the value spike for GBP may wish to consider getting in touch with us and covering requirements with spot trades for now or fixing forward rates for the near future.
GBP/EUR movement can be seen on the graph below:
The pair traded in a narrow range and eventually ended the week lower once again. There is not much to be said that is positive for either side yet. EUR suffers from fears that growth has peaked while the Fed may not be as hawkish as some expect. If anything is going to make a dramatic difference over the coming week it is not an expected event.
EUR/USD movement, or the lack of it, can be seen on the graph below:
Not trading your currency is still a risk. The markets will move, volatility and relative values will vary but whatever your foreign currency exchange and international payment needs, you can rely on the team here at Aston Currency Management. Please do not hesitate to get in touch with us, we look forward to hearing from you. Now, if you will excuse me, I have to find my Terms and Conditions for Facebook. Have a great week.
Written by Damien Lipman