ref :- "Sterling rallies as investors bet "softer Brexit" more likely after resignation" , Reuters Markets
There's a whiff of optimism in the air this morning, a bit of "risk-on" impetus that's been in short supply of late. The evidence is most obviously seen in stronger equity markets and a US dollar weaker across the board. A stronger Chinese Yuan Renmimbi, supported by a firmer fixing by the PBoC, has prompted rallies in Asian equities and EM currencies generally, and Friday's strong German manufacturing data has encouraged a little faith that the European recovery is still on track after all.
Also playing a role in the marginally more bullish atmosphere today is the market's interpretation of Friday's US jobs data for June. You would be well within your rights to argue that the report was a bit mixed, but the market has chosen to take the stronger-than-expected Non-Farm payrolls number as evidence of continuing strong growth (good for equities), whilst at the same time looking at the slightly weaker-than-expected Average Hourly Earnings figure as non-inflationary and therefore not exerting any extra pressure on the Fed to tighten rates any quicker (hence the weaker dollar).
*** By the way, on that note you need to keep an eye out for US inflation data on Thursday : year-on-year CPI due 2.9%, ex-food and energy 2.3% ***
Some people might suggest that perhaps the market is interpreting the data in an overly rosy fashion, reading the numbers the way it wants to. Well perhaps, but it's more likely that the people who would make that suggestion are those that have read things differently and are little disconcerted by the fact that in the very short-term at least the market's gone against them. It happens to all of us occasionally and anyone who tells you differently is being a touch economical with the truth. Take UK sterling this morning , for example ...
On hearing the news that Brexit Minister David Davis (and two of his team) had resigned, we fully expected that any benefit that the British Pound may have derived from getting the cabinet to agree a party line on Brexit on Friday would have been more than wiped out. You've got to have some sympathy for PM Theresa May, who would seem to be in an impossible position. No sooner had she succeeded against the odds in righting the ship at the make-or-break summit at Chequers, than she sees it holed below the waterline again by the resignation of key Brexiteers. At least, that was our initial reaction .... but not the market's.
Notwithstanding the increasing likelihood of a rate hike next month, sterling's strength this morning is largely the result of the market's interpretation of Mr Davis' resignation. The thinking goes that getting the Eurosceptic Brexit minister off centre-stage increases the chances of a "soft", market-friendly Brexit.
There's an old motto wheeled out by traders that the market is always right. The adage may be a bit tired but it can be a very expensive business trying to prove that the market's wrong. One of the first lessons any budding trader must learn is when to cut losses -- quickly and decisively -- when the market interprets things differently. But this morning, after a few hours and after hearing the arguments, we have to confess that we are still not convinced by the bullish spin being put on events.
With or without Mr Davis, by all accounts, the UK's position would have to move quite a lot further before it would be remotely acceptable to the EU. And let's face it, the EU will be even less likely to make concessions to opposing negotiators standing on such weak foundations. Weakened by presiding over such a slim minority government, Mrs May will also have to deal with rebels within her own party who favour a much more fundamental break with Brussels.
Whilst there's little doubt that sterling will look seriously undervalued at these levels should Mrs May manage to bring off a soft Brexit, there are some pretty mountainous hurdles to be overcome before we get to that stage. We can't help feeling that with such dangers still hanging over the Prime Minister's plans, it's not entirely logical to come over all optimistic about this morning's developments. Plainly though, others feel differently about things .....