Sterling Trounced by Growing Political Challenges

The US dollar has begun the new week on firm footing, without the help of
either higher interest rates or increased confidence that Congress will agree
on a tax plan.
  Indeed, over the weekend the Chair of the House Ways
and Means Committee was explicit that the Senate plan to repeal the federal tax
break for state and local taxes will not find support in the House of

The US 10-year yield is pulling back from the 2.40% cap it approached at
the end of last week, and this is allowing the yen to buck the general strength
of the greenback today.
  Important support is seen around JPY113.00.  Japanese equities extended its
pullback for the fourth consecutive session today.  The Nikkei lost 1.3%,
the most since May.  The Nikkei has rallied nine consecutive weeks through
last week.  Cyclically adjusted price/earnings ratio (CAPE), put Japanese
shares at about 42% of there average since 1983.  In comparison, US shares
are 2/3 above their average valuation.  Such considerations appear to have
helped draw foreign investors back into Japan over the past couple of

The main developments today though is sterling.  It had gained
0.9% last week amid broad dollar weakness, but today it is giving it all
back.  Sterling tested last week’s lows near $1.3060.  The main
weight is political rather than economic.  Prime Minister May is besieged from at least three forces that
seem almost impossible to reconcile.  

First, according to a UK paper,
there are 40 Tory MPs that would sign a letter of no confidence in May. 

Under party rules, 48 signatures are needed to trigger a formal leadership
challenge.  This weakens her hand in
Brexit negotiations and opens her up to criticism from Labour, which also
supports Brexit, but holds out the promise of a softer Brexit (whatever that

Second, a UK paper reports that the hardline Brexit ministers, Johnson
and Gove wrote a “secret” letter to May.
  Reportedly they outlined their plan for an exit without a deal
with the EU and was critical of some in
the government who want a less confrontational approach (Chancellor of the
Exchequer Hammond).  While the substance of leaks is interesting to be sure, they should always be embraced with a question of whose interest
is it to “leak.”  It seems
May would have not interested in
revealing the letter’s content.  Johnson and/or
Gove would seem to have the more to gain, at least in the short-term, in their
battle for Brexit, but it would seem to further
taint their candidacy to replace May.  

Third, May is facing increased pressure from the EU.  Last week,
it was given two weeks to make progress on its financial obligations to the EU,
propose how to resolve Northern Ireland’s border with Ireland
post-Brexit.  A number of solutions
are possible, but the UK government’s choices are
compromised by its reliance on the
Democratic Unionists from Northern Ireland to secure a parliamentary

These political developments are ahead of what many expected to be a week
dominated by important economic data, like CPI, retail sales, and the latest
labor market and earnings update. 
While the driver today is
political, VISA did report a sharp drop in household expenditures. 

Sterling has not traded below $1.30 since early September. 
Trendline support (from June and August lows) comes in a little below there
now.  The euro appears poised to test the highs seen earlier this month
near GBP0.8940.  Sterling is testing JPY148. Additional nearby support is seen near JPY147.70.  A convincing
break could spur a move toward JPY146.00.  

There have been two other developments to note.  First, the loss
of another dual-citizenship MP means that Prime Minister Turnbull now leads a
minority government.  The government is
supported by independent MPs, but the distraction is significant and may
undermine Turnbull’s legislative agenda.  The latest polls show Labour is
extending its lead over the government coalition (55%-45%).  Support for
Turnbull is slipping to its lowest (~36%) since he became Prime Minister in July
last year.  The Aussie is trading a bit heavy,
but it remains within the range set last Tuesday (~$0.7627-$0.7701) for the
fourth consecutive session.  

The other development to note is from China.  It reported money
supply and lending figures.  Money supply and new lending slow considerably in October.  It may be
related to the 19th Party Congress, but it is also consistent with the slower
activity anticipated after a stronger than expected first half. Separately,
note that reports suggest that mainland investors bought the most Hong Kong
share of the year today.  The net CNY5.07 bln (~$765 mln) was the most
since the end of last year.  The Hang Seng Index rose 0.2%, and Chinese markets were also higher,
which bucked the heavier regional tone.  The MSCI Asia Pacific Index fell
0.6%, after shedding 0.3% before the weekend. 


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