Morning Report: 12 October 2018

October 12, 2018

GBP. Yesterday evening Theresa May briefed her inner cabinet as she faced opposition over a “backstop” plan for the Irish border that could see the UK locked in a customs union indefinitely. The Financial Times reported that two Eurosceptic cabinet ministers were on the verge of quitting in protest of the backstop option, which would increase pressure on the PM as factions continue to test her leadership skills. The news contained sterling’s rally as the G10 made gains across the board against a weakening dollar. With no UK data pencilled in for the rest of the week, all eyes will be on further Brexit developments and possible revolts within the Tory party following May’s leaked plan for a backstop option.

EUR. The common currency showed that it hasn’t lost its touch yesterday as it gained against most G10 currencies, including both GBP and USD. The European Central Bank Meeting minutes revealed ECB monetary policy is not on autopilot and is still sensitive for incoming data. This fuels the expectations for some that rate hikes have the potential to be shifted a bit forward from Autumn 2019, which some see as overly dovish. Eurozone Industrial Production comes out at 10:00 BST today.

USD. USD took a hammering yesterday, and sold off against the entire G10, after Donald Trump continued his criticism on the tightening policies of the Federal Reserve, while hosting Kanye West in the White House. Without the need of a beat, the US President spat some lines about the “out of control” Fed, blaming the institution for the worst equity sell-off in US markets since February this year, but kindly added he won’t fire Fed Chair, Jerome Powell. Trump may have then welcomed the Consumer Price Index print that came out in the afternoon and showed price growth didn’t accelerate as fast as expected and remained 0.1% in September for both the Core and Headline reading. Finally, a report by Treasury staff was sent to Finance Secretary Steve Mnuchin, detailing they found little evidence for labelling China a currency manipulator. While the trade war rages on, this eased pressures on Asian currencies somewhat. Today we have Import Prices at 13:30 BST, followed by Preliminary University of Michigan Consumer confidence at 15:00.

CAD. The loonie was lost for direction yesterday amidst oil prices that are coming off and cracks appearing in the “happily ever after” story of NAFTA 2.0, which kept CAD pinned in the middle of the G10 currency board. Brent Crude oil had a taste of life below $80 a barrel again yesterday, after topping the $85 mark as recently as Wednesday. In regard to these wild swings in oil markets, the Canadian dollar appears to react almost stoically, which tells us other factors may be a bigger mover of CAD at this moment. Mexico was “not amused” meanwhile by Canada’s decision to apply a provisional tariff of 25% on specific grades of steel, showing trade tensions in the Americas may not be over yet, despite the new USMCA deal.

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