Morning Report: 18 October 2018

October 18, 2018

GBP. Yesterday was another difficult day for the pound as Wednesday’s summit, which held great expectations as recently as the weekend, proved uneventful. The main takeaway from the dinner to discuss Brexit was that Theresa May was willing to extend the Brexit transition period from 21 months by an extra year. Michel Barnier, the EU’s main Brexit negotiator, has been beating this drum for a while now, and yesterday’s developments saw May bend to the will of the EU at risk of riling up the Eurosceptics within her own party. Elsewhere, yesterday’s Consumer Price Index release for August saw headline inflation fall from 2.7% to 2.4%, in line with the Bank of England’s expectations earlier in the year. This lower inflation is beneficial to real wage growth, which then holds the potential of boosting consumption in an economy that is expected to slow down in Q4. However, today’s Retail Sales release at 09:30 BST doesn’t hold much promise. The precursor to today’s release, the BRC Retail Sales Monitor, fell in September suggesting transitory shocks that increased consumption previously will begin to fade.

EUR. A swift rejection from a European Budget Commissioner of the Italian government budget quickly shifted the helm southwards for the single currency, with losses especially pronounced against the strong US dollar. The German EU Budget Commissioner Günther Oetinger said the budget was not according to EU guidelines, which was expected, and can be seen as one of the opening moves of a tug of war over the budget between the EU and Italy that can last for months. September’s Final CPI reading came in at 2.1% for the headline reading and 0.9% for the core version, both exactly according to expectations. Today is the official start of the EU economic summit, which might feature more comments about the Italian budget, the need for further European integration and above all, another episode in the great odyssey called Brexit.

USD. Hawkish Federal Open Market Meeting Minutes gave the greenback just that extra push it needed to top the G10 currency board yesterday, with gains extending this morning. A majority of FOMC members are now in favour of letting the rates increase above the so-called neutral level for some time, which means the US is getting ready for a period of constrictive instead of loose monetary policy. Elements of war and peace were both present in the Treasury Currency Report released yesterday, which refrained from outrightly calling China a currency manipulator, but did send out a stern warning about the lack of “currency transparency and the recent weakness of its currency”. The fact that CNY sold off somewhat against the dollar can be seen as a sign markets remain worried that currency dynamics may potentially be used as a reason to further escalate the US-Sino trade war.

CAD. The loonie may have escaped from living under a bubbling volcano threatening to blow-up with regards to the NAFTA treaty, but still doesn’t seem to have moved on to a brave new world, which was also the case yesterday when it ended in the bottom of the G10 currency pack. Oil prices saw a massive drop which was likely the main cause for the loonie’s slump, which couldn’t be compensated for by the Manufacturing Sales that came in above expectations with only a  -0.4% contraction for September. Still, some upside potential may lie ahead for loonie as the Bank of Canada meets on Wednesday next week for a rate decision and a hike is currently priced in for 93% by future markets now NAFTA uncertainty has lifted.

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