Dollar Consolidates Weekly Gain, While Equities Ease To Start New Month

The release of the manufacturing PMIs confirms that the synchronized global expansion remains intact. The focus today is on three unresolved political challenges: US tax reform, the UK-Irish border and the talks that may produce another grand coalition in Germany.

The US dollar is mixed, with the dollar-bloc currencies and Scandis pushing higher. The euro and yen are hugging yesterday’s close, while sterling is paring this week’s gains. In fact, sterling remains the only major currency that gained against the greenback this week. It is holding on to a little more than a 1% gain this week. It is the fourth consecutive advancing week and the largest move seven weeks. 

Equities were unable to follow the US higher. The MSCI Asia Pacific Index made it a clean sweep with its fifth consecutive decline.  The Dow Jones Stoxx 60 is off 0.7%, which would be its largest decline since November 9. It was flat on the week coming into today’s session. Benchmark 10-year yields are mostly 2-4 bp lower, including US Treasuries, which have been turned back from the poke through 2.40% yesterday. 

While the UK’s willingness to raise its initial financial offer to the EU for the amputation, the thorny issue of the Irish border is unresolved. The problem comes down to this: The UK’s decision to leave the EU and the single market requires it to have border controls for people, goods, services, and capital. The EU and Ireland insist that there is no hard border between Northern Ireland and Ireland. That is an important basis of the Good Friday Agreement that helped bring peace the Emerald Island. May’s political gambit of snap elections earlier this year resulted in a loss of the Tory’s majority. The government now depends on the Democrat Unionist Party from Northern Ireland. The DUP insists that the hard border is not within the UK, in a Hong Kong-like arrangement. 

Hence the problem: the hard border cannot be outside of the UK (between Northern Ireland and the Republic) nor inside the UK (between the UK and Northern Ireland). The DUP is threatening to leave the government if its demands are violated. Monday is the EU-imposed deadline for an agreement that would allow the next phase of negotiations to begin. Prime Minister May is to have lunch with Juncker then and was expected to signal a proposed resolution. The deadline seems soft in the sense that theoretically the real deadline in the middle of the month heads of state summit.