Morning Report: 05 October 2018

October 5, 2018


GBP. Sterling had a strong rally yesterday off the back of a Reuters headline suggesting the Tory party had submitted a new proposal to the EU regarding the Irish border. This saw sterling surge to the top of the G10 currency board as EU officials claimed: “this is a step in the right direction”. However, the clock is ticking with only 176 days until the March deadline. GBPUSD has been a key barometer of Brexit risk and remains highly sensitive to minor developments in Brexit negotiations as investors try to predict sterlings rebound from low levels. With little pencilled for sterling in the data calendar today, further headlines on Brexit will be the main source of volatility in the market.

EUR. On balance, yesterday had a quite upbeat feel to it for the euro despite no important economic data or new developments from Italy materialising. This morning started off positive for the single currency with German Factory Orders, a leading Indicator for Industrial Production, beating targets with a growth of 2.0% in September. This was a welcome surprise after two rather weak months in a row. Italian Retail Sales will be our main interest today at 9:00 BST.

USD. Today remains a key day for the dollar. After the DXY composite index broke through the upper bound of its recent range, the DXY index is back at the upper range after a poor performance by the dollar yesterday. Unemployment data released today at 13:30 BST could show a further tightening of the labour market, and if wages begin to grow at a faster rate than 2.9% YoY, fixed income markets may start to price in a more aggressive Fed for next year. This has already started with the US 10-year yield now sitting at 3.2%. Should this pricing continue, one should expect a swathe of dollar strength against most currencies.

CAD. CAD couldn’t keep up with its strong rally seen over the last week and a half and weakened on the back of weaker oil prices and a dismal Ivey PMI. The loonie had to recede some terrain against all G10 currencies, except the Kiwi dollar. WTI in a move of nostalgia dove below the $75 mark again yesterday, but is slowly strengthening again as of yesterday evening. The September Ivey PMI, which measures economic activity from purchasing managers in Canada, had a shocker of a miss at 50.4, just a hair above the neutral level of 50, where a score of 63.2, signalling a strong expansion, was expected. However, the day may have been darkest just before the dawn as the survey responses were collected at the moment when Trump’s threats to strike a new NAFTA deal without Canada reached their peak, which is why we expect a rebound in next month’s edition. Today home-bred Canadian data will again have the potential to move the needle with Employment Change, the Unemployment Rate and Trade Balance coming out at 13:30 BST.

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