Brexit follies and the masters of procrastination
April 12, 2019
The whole nation takes a sigh of relief as yet another no-deal exit is avoided and Parliament breaks up for over a week. The lack of Brexit headlines will be a welcome sight, but cross-party talks will continue in the background despite the MPs Easter holiday as the government tries to avoid an expensive, and potentially messy, European election. However, should these talks break down, a series of indicative votes would likely follow to break the impasse. In options markets, traders are becoming slightly more optimistic on sterling’s fortunes in the coming 3-months as the premium paid for downside protection falls compared to that protecting sterling upside. The pricing is likely due to a cliff-edge exit recently being averted, which means a bit of breathing space for sterling longs.
The euro resided in the top half of the G10 currency board yesterday as markets digested the European Central Bank meeting on Thursday, which had Mario Draghi emphasize the ECB has “plenty of tools”. Today at 10:00 BST we await the February Industrial Production, which will tell us to what extent the pessimistic survey data translates in the hard output data.
After three consecutive days of losses, the greenback came back in control again yesterday, topping the G10 currency board lifted by a strong Producer Price Index reading. Both headline and core PPI left expectations well behind them, coming in at +0.6% and +0.3% in March respectively, with especially headline standing well above the trend. This may well lead to a downward correction next month, however, for now, the risks of a pass-through from producer prices to consumer prices appear to be to the upside. Today sees the Import Price Index at 13:30 BST, which may teach us more about how tariffs lead to higher import prices.
The loonie fell half a percentage point yesterday as the US dollar roared on and oil prices slipped from recent highs. News from Iraq about potential production increases, from 45k barrels per day to 140k bpd at the Baji refinery, and a Reuters article outlining potential production increases from OPEC+ caused crude prices to falter. OPEC officials are worried about further cuts in supply from Venezuela as it battles political uncertainty and further sanctions from the US on Iran. Further, underlying demand indices remain tentative as manufacturing sectors around the globe show signs of declining.