Morning Report: 09 July 2018

July 9, 2018

GBP.  Sterling gained over half a percentage point over the course of last week against the dollar, whilst also making minor gains against the euro. Last week’s meeting at Theresa May’s country residence Chequers, Buckinghamshire, concluded with a common stance being negotiated. Said common stance would see a soft-Brexit scenario play out, with a Norway style access to the single market. A soft-Brexit style deal was agreed upon in order to allow a business friendly exit from the trade bloc, but has recently seen key Brexit ministers resign from their respective positions – David Davis’ resignation last night was the most notable as Brexit Secretary. Sterling has started today on the front foot, suggesting markets are willing to overlook the possibility of a vote of no-confidence, due to clarity of the government’s approach to negotiations being developed and in a business friendly manner. Tomorrow, the Office of National Statistics releases its first monthly estimate of Gross Domestic Product for the 3-months leading up to April, with a halt in the growth of the UK economy expected. Wednesday, a NATO meeting will be held on the outskirts of Brussels where the topic of defence spending will likely dominate, and Donald Trump makes his first visit to the UK as President on Thursday.

EUR. Positive data had the single currency start off the weekend in a good mood last Friday, with gains especially visible against the US dollar. German Industrial Production grew by 2.6% in May, strongly outperforming the 0.3% forecast, while Italian Retail Sales also came in strong at +0.8% in May. Further silver lining was added to euro’s day when Reuters featured a story about China seeking closer trade ties with the European Union to form one front against the US. This week will see European Central Bank President Mario Draghi speak on Monday and Wednesday, with the German ZEW Economic Survey on Tuesday, and the Meeting Minutes of the ECB’s latest policy meeting on Thursday. Market participants will eagerly scrutinize the latter for more details on the historic decision taken at this meeting to end the Asset Purchasing Program.

USD. The imposition of last week’s tariffs saw the USD post losses against the whole of the G10 currency board, with most of the losses realised on Friday when tariffs were implemented. Friday’s Nonfarm Payroll’s suggested that despite the economy hiring 202,000 more workers in June, the increase in those joining the labour market negated this increase, causing the headline unemployment rate to creep up from 3.8% to 4.0% and setting off the dollar’s downward trend. There has been little escalation in rhetoric from both parties in the dubbed “Trade War” after the 25% tariff was implemented on $36bn worth of goods from both sides on Friday. This week, Chinese Consumer Price Index inflation figures are released on Tuesday, which is expected to tick up to 1.9%, and the US will also release CPI figures for June on Thursday with inflation expected to rise to 2.9%. This will be a common theme in the coming months as tariffs increase the prices of imported goods. Any further escalation or increase in the perceived time of the implementation may force the respective central banks into action, with the Federal Reserve already highlighting the costs to the economy from tariffs.

CAD. A bag of mixed trade and labour market data kept the loonie trading in a tight range on Friday, while the higher WTI crude oil prices seemed incapable of lending the loonie a strengthening hand. Unemployment was higher than expected in June at 6.0%, with wage growth also a tad on the soft side at +3.5%. A stronger increase in employment saved the jobs report, adding 31.8K jobs in June to the Canadian economy. The Trade Balance deficit rose slightly, but as it is too early to really distinguish any effects of recently installed US tariffs, the impact of this miss remained muted for now. This week all eyes will be focused on the Bank of Canada rate decision on Wednesday, which is likely to see a BoC that is confident enough to hike, though the question will mostly be whether any hike will be hawkish or dovish.

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