Morning Report: 10 October 2018

October 10, 2018

GBP. It was a case of another day another Brexit story yesterday, which had sterling on the offensive as the stories struck a tone of possible compromise. The Wall Street Journal published an article claiming that divorce terms could be settled by Monday by both UK and EU officials. This caused a spike in the pound, as previous speculation had proved correct. This morning, further Brexit news is coming thick and fast. The Times reported as many as 30 Labour MP’s are willing to vote against their party’s stance and support May’s Brexit plan to avoid a no deal scenario. However, with former Brexit secretary David Davis writing to every Conservative MP imploring them to rally against the government’s current Brexit plans, and a cabinet meeting set for next week, the risk of a reversal in fortunes remains high for the pound. All eyes this morning are on sterling’s first top-tier data release this week. Gross Domestic Product figures are released for August at 09:30 BST alongside Manufacturing and Industrial Production data for the same month. With 0.1% MoM growth forecast, as many analysts expect a slowdown in the UK economy in Q4, the benchmark remains low for a positive surprise to spur sterling higher.

EUR. The single currency continued its slow start of the week yesterday by weakening across the G10 board, bar the Swedish Krona, as the Italian budget still softly simmers in the famous fiscal kitchen of the new Italian government. The cost of borrowing for the Italian government hit a four year high, as Finance Minister Giovanni Tria failed to reassure markets by stating that whilst the prospect of a widening deficit for the country was “concerning”, it was also “necessary” to stimulate economic growth. Adding to the robust defence of current plans from Italian politicians, Five Star Leader Matteo Salvini said the 2019 Italian budget “won’t change”, while his counterpart from The League Luigi di Maio pledged there’s “no going back” on the budget and to do so would be “betraying Italians”. The nervousness of markets got one step closer to the boiling point as the deadline on which a draft of the budget should be submitted to the European Commission on the 15th of October draws ever closer. French Industrial Production showed a welcome surprise at +0.3% for August, with the July reading was being upwardly adjusted as well. Italian Industrial Production is out at 9:00 BST.

USD. After a strong performance last week and a bank holiday on Monday, USD took its foot off the pedal somewhat yesterday, taking losses against most of the G10 as US yields slightly retreated from 7-year highs seen earlier. The Global Economic Outlook of the International Monetary Fund revealed it sees a higher strain of trade wars on the global economy in the coming year, which can prove supportive for the greenback as it recently profited from safe-haven flows on the back of this. The fund also remarked that it expects four rate hikes by the Federal Reserve in 2019, which is above the median market expectation at this moment in time. Today sees Producer Prices at 13:30 BST, while some speculate that the semi-annual US Treasury Currency Report might also be released. In the last edition, China wasn’t attacked as a currency manipulator, but this can all change in today’s report as the yuan has significantly weakened against USD in the meantime and the trade war intensifies. Given the PBOC’s recent monetary policy adjustment, the yuan may be under increased scrutiny in H2’s report.

CAD. USDCAD continues its tumultuous downtrend as the pair broke its recent 5-day rally yesterday to stay within its broad downward channel. The reversal of the rally occurred in spite of Housing Starts data in September surprising to the downside. Today, at 13:30 BST further housing market data is released with Building Permits MoM for August expected to increase by 0.5%.

FX Elsewhere: Norway’s September Core Consumer Prices growth showed a solid beat, coming in at 1.9%, higher than the 1.8% median forecast and making the 1.6% expectation of the Norges Bank suddenly look rather conservative. This accelerating inflation supports the confidence of the NB to continue on their hiking path, likely hiking again in December and confirming the NB is indeed one year ahead of the European Central Bank in its hiking cycle. Unsurprisingly the Norwegian krone tops the G10 currency board this morning with the potential of a further rally over the coming weeks as this hiking path gets completely priced in, while Unemployment is near a decade low and oil prices remain supportive.

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