Morning Report: 15 November 2018

November 15, 2018

GBP. A make or break day for May and the pound proved anticlimactic after the Cabinet meeting drew into the evening yesterday. Last night’s press conference was cancelled along with Dominic Raab’s meeting with Michel Barnier, and May’s short statement looks like the anticipation around Brexit will be delayed until 10:30 today where she will face still opposition in Parliament. The fractious Q&A following her proposal of the draft deal could go on for up to 3 hours. Overnight volatility in sterling options remains high, and downside protection remains relatively expensive. The market is preparing for a tumultuous few weeks both politically and in sterling’s price, as May seeks to navigate her deal through a deeply entrenched and divided house. Today’s data at 09:30 will undoubtedly be ignored by markets as the real elephant in the room gets addressed only an hour later. Letters of no confidence reportedly mount in the background, as risks to May’s leadership prevail. Today may supply the fireworks yesterday promised.

EUR. For the second day in a row the euro profited from advances in the Brexit process and the currency managed to put some distance between itself and the troughs of the EURUSD trading range. The correlation between sterling and euro moves is at the highest point in a year, showing that the impact of Brexit on the single currency strengthens as the endgame of the process progresses towards its final deadlines. This seems very much justified, as details of the exit of Europe’s second largest economy naturally will have their impacts felt across the continent as well. Germany’s second reading of Q3 Gross Domestic Product growth showed a surprise contraction of 0.2% due to a slowdown in the car industry. Eurozone’s Q3 reading slowed down to 0.2% as was expected by analysts, which means that other countries compensated for Germany’s negative surprise. Eurozone Trade Balance is out today at 10:00 GMT, though it will like be a ripple compared to the waves Brexit developments are causing at the moment.

USD. The dollar continued to unwind yesterday after CPI and real earnings data were released. Although the headline figure was broadly in line with expectations, core inflation showed a bit lower than expected and weekly average wages relatively below September´s growth. Although FED´s Chair Jerome Powell declared in a Dallas speech that US inflation was in line with projections and that there are still no reasons to deviate from current monetary policy agenda, he also highlighted concerns over a modest deceleration in global growth, whose pace last year was a major determinant in the US economic boost. Today we have Retail Sales and foreign trade price indexes in the calendar released at 13:30 GM.

CAD. Nothing lasts forever – a truism that’s even held in the world of FX as even the intimate relationship between oil moves and CAD strength seemed to have broken down. The loonie held relatively firm during the 12-day losing streak of oil that lasted until Tuesday, but was also slightly soft across the G10 currency board yesterday, despite oil trading up. US democrats shared they may want to revise some parts of the new USMCA deal, which can bring improvements in the trade relationship with the US, but also more uncertainty. The Democrats may hold the balance of power in the House of Representatives in the US, but as President Trump still is in control of trade and foreign policy, this idea by the Democrats may prove quite ethereal for now.

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