I have to admit that I thought the Fed would hike in September and I was wrong. I thought she would because she should, but eh this is Janet Yellen. She will just not press the button unless she is in the last days of December and she has to do it because she said she would raise rate this year and this is the last time she can actually deliver on her promise. So there will be hike in December (largely priced by the bond market), just like last year and maybe just like next year. Last month, I had commented on the need for Draghi to start addressing the issue of the end of QE in March 2017. Does he read my monthly comment? Really? In any case, he let go a trial balloon (though officially denied, but we know the drill...). What about an extension of QE with tapering? What a neat way to get everyone on his side! Germans see the end of their nightmare and the periphery gets another year of QE IV drip. Of course, nothing gets solved, but by the end of tapering, Draghi will probably face different interlocutors in Berlin, Paris and Rome and will see by then.
We will end this month’s comment on a few words on Brexit. It had disappeared from front pages for some time, but Theresa May started to unveil her vision of what Brexit meant and this sent the pound 5% lower against major currencies. Was it an over-reaction from the City, as this privileged caste discovered that their fate was no longer the alpha and the omega of the government’s strategy and that no one in Westminster seemed to be horrified that the cost of their frequent trips to the family country house on the continent or the alpine chalet had soared in the wake of the pound’s devaluation? Who knows? In any case, as I have argued before that Brexit creates uncertainty and economic agents dislike uncertainty, so the renewed bout of weakness of the pound is not a real surprise. Negotiations will be hard indeed but probably not the way the media expect it. However hard the negotiations between the UK and the EU will be, the harder part will come later, when the EU needs a unanimous vote to approve the deal. Good luck with that. Brexit has really opened a can of worms.
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