August 30, 2018 / 7:40 AM / in 23 days

Daily Briefing: Wishful thinking? Pound buoyed by Barnier

LONDON (Reuters) - Despite new comments from Michel Barnier this morning warning of the need to prepare for a no-deal Brexit, the pound continues to take heart from his words in Berlin last night on the prospects of an ambitious future EU-UK trading relationship.

Britain's Secretary of State for Exiting the European Union Dominic Raab and the European Union's chief Brexit negotiator Michel Barnier at the EU Commission headquarters in Brussels, August 21, 2018

It's worth noting that, in terms of the substance, there is strictly nothing new here from the Brussels side: Barnier merely re-formulated the Brussels aspiration for a trade deal of "unprecedented scope and depth" which he already described in an August 2 newspaper article.

"We are prepared to offer Britain a partnership such as there never has been with any other third country"

Yesterday he was also very careful to repeat the EU’s existing red lines and warn against any “cherry-picking” of the benefits of a single market.

It is also unclear from a tactical standpoint why the EU’s chief negotiator should all of a sudden relent and soften his position now: do UK observers think this is evidence of Brussels blinking first as the fear of a no-deal Brexit mounts?

Some detect at least a tonal shift from Barnier in recent weeks. That may be true. But so far at least, that has not translated into a discernible change in the EU’s basic negotiating stance.

“They just came out and surrounded our fleet, throwing petrol bombs. It was mental”

The politics story that came out of nowhere this week was the renewal of hostilities over scallops in the English Channel. French vessels rammed British dredgers off the coast of Normandy in protest at their fishing during a period the French have set aside for the bivalve mollusks to breed in peace.

The row had flared up five years ago but was eased by yearly agreements. With Brexit in the offing, the French feel the English are less inclined to seek such accords. Talks are due from today to broker a truce.

MARKETS AT 0655 GMT

People walk past an electronic board showing currency exchange rates in Buenos Aires, Argentina, August 29, 2018

Sterling extended Wednesday’s one percent rebound against the dollar and euro after EU Brexit negotiator Barnier said a specially tailored post-Brexit trade deal with Britain was on the table.

Exaggerated in part by the unwinding of recently built short positions, the pound has recaptured $1.30 for the first time since August 6 and euro/sterling has slipped back further below 0.90 – shrugging off reports that any final Brexit deal may be delayed a little beyond the October EU summit and more equivocal comments from Barnier on Thursday that the EU must be prepared for a no-deal Brexit.

Sterling was also helped by a newspaper report on Tuesday that the UK government had asked Bank of England chief Carney to stay on for an extra year beyond his scheduled departure in June 2019, even though Britain's finance ministry denied the details of the story.

The dollar was stronger elsewhere, however, with euro/dollar failing to retain a foothold above $1.17 and emerging-market currencies such as Argentina’s peso, Turkey’s lira and China’s yuan weakening sharply again overnight.

The International Monetary Fund said it was studying a request from Argentina to speed up disbursement of a $50 billion loan programme after a collapse in investor confidence in President Mauricio Macri's government sent the peso tumbling more than 7 percent on Wednesday, its biggest one-day decline since 2015.

"There’s no getting away from the fact that the Turkish economy is experiencing a deep downturn"

Dollar/lira continued to rise too, jumping above 6.50 in early trading for the first time in two weeks, after Moody’s on Wednesday downgraded 20 Turkish banks and financial institutions, fears grew about heavy foreign debt refinancing next month and October and economists warned of a rising risk of recession when business-confidence readings fell to their lowest in almost 10 years.

China’s offshore yuan weakened again, retracing much of its bounce since last Friday, and Shanghai and Hong Kong stocks underperformed Asia peers on Thursday with losses of about 1 percent. Despite rising optimism about successful NAFTA trade talks, there was little sign of optimism about moves to avert the latest U.S. round of tariffs on Chinese goods due next month.

Dollar gains more broadly were supported by firmer U.S. Treasury yields, with the 10-year above 2.88 percent, and another series of record highs set by U.S. stock indices, led by the top technology and internet stocks. 

U.S. and European stock futures were down a touch first thing Thursday, with European stock and bond markets eyeing the release of German and Spanish August inflation numbers later in the session.

— A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Mike Dolan. The views expressed are their own —

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