Sell sterling!
Brexit pain and a cyclical downturn are weighing on the British pound. Markets will react to the latest proposals for a border between the Republic and Northern Ireland. Watch for sterling to lurch negatively, with the GBP/USD failing to break its 50-day moving average and falling to a 0.7000 level.
A one-year clock is on the field for Brexit, highlighting the UK’s weakness. Europe has a massive internal market that companies can depend on for growth. The UK by contrast is fragmenting within itself, specifically in Northern Ireland and Scotland, and needs exports to grow. If a EU-UK trade war breaks, the UK is in much less desirable spot then Europe. More broadly, worries of a trade war will put defensive stocks in demand. Cyclical and tech driven stocks will be exposed. Fair commodity prices depend on free trade: endangering this artificially tightens supply and drives up prices.
Japan slows
Manufacturing in Japan is starting to slow down. The Bank of Japan’s Tankan indicator slipped to 24 from 25, its first decline since Q1 2016. The decline is felt in all major sectors, from textile, paper, chemicals, food and metals. Tankan’s Q1 non-manufacturing indicator remains stable at 23, weakened by construction, rental, wholesale trade, transport and information services.
Against an appreciating yen (year-to-date: EUR/JPY: -3.42%, USD/JPY -5.87%, GBP/JPY: -2.16%) and trade war tensions, business confidence is slightly shaken. Still, Japan’s trade position is favourable. The February trade balance remains at JPY 2.55 billion, with exports up 1.80%, and February’s retail sales expanded 0.40% (previous: -1.80%). We expect China-US trade sanctions to ease in coming weeks, which would trigger recovery for Japanese exporters. Yesterday’s US equities 2% drop knocked down the USD/JPY by 0.37%, confirming JPY’s safe haven status. We expect USD/JPY at 106.06 to recover slightly toward the 106.12 range.