Morning Report: 2 July 2018

July 2, 2018



From: Simon Harvey
Sent: 02 July 2018 08:55
To: Bart Hordijk; Carlos De Donesteve; Gonzalo de la Torre; Maria Translatium; Ranko Berich; Traders
Subject: MR 020718


GBP.  The pound finally managed to regain some ground on Friday, as the final reading of the UK’s first quarter GDP growth figure for 2018 was revised slightly upwards, to 0.2% for the quarter. The main driver for the positive revision came from the construction sector, which had not suffered as badly as first thought. Nonetheless, Brexit uncertainty still looms over sterling, which still posted a weekly loss against the dollar, despite Friday’s surge. The UK Cabinet prepares to meet on Friday at the Prime Minister’s official country residence in Chequers, Buckinghamshire, in order to draft a white paper about the type of relationship the UK wants with the trade bloc post-Brexit. Theresa May will be playing a balancing act in order to bring together both sides of her party in a common stance towards negotiations, with a ‘back the prime minister or resign’ approach being floated by media. The BBC reports that officials have come up with a third model for a post-Brexit relationship, which will be discussed at Chequers later this week. Details on the meeting and the third type of post-Brexit model will be released next week, shedding some much needed clarity on negotiations. Regarding data releases, we have manufacturing data out this morning, followed by construction data tomorrow, and service sector numbers on Wednesday.  With Bank of England Governor Mark Carney also due to give a speech during a regional visit to the North East on Thursday, the week is likely to be a volatile one for the pound.


EUR.  The single currency experienced firm gains on Friday against USD, paring back a large part of the losses EURUSD made earlier during the week. The boost in sentiment came after a deal on the ongoing migrant crisis was announced, in particular easing pressure on German Chancellor Angela Merkel, who had been under fire domestically. Nonetheless, doubts regarding the deal have emerged over the weekend, with Merkel’s interior minister Horst Seehofer- the leader of Merkel’s coalition partner, the Christian Social Union- threatening to resign this morning, unless an agreement was reached with other EU leaders that his party deem acceptable. Regarding economic data, the released figures were mixed, with soft German Retail Sales that declined 2.1% in May, but German Import Prices rose 1.6% in the same month. Taken together with the Flash Consumer Price Index printing 2.0% in June, which eventually tipped the scales to the positive side for Eurozone data on Friday. Eurozone data this morning is dominated by manufacturing figures from across the region, followed by service sector data later in the week.


USD. The dollar made broad gains against the G10 currency board over the course of last week, with the exception of CAD and EUR. However, the greenback posted rather hefty losses Friday against all G10 currencies except JPY as the quarter drew to an end. The greenback has started on the front foot this morning with only JPY making ground from the G10 board. As the July 6th deadline approaches this week, trade tensions and protectionism are in focus, with Canada implementing tariffs of USD$12.6bn on Sunday in retaliation to the Steel and Aluminium tariffs from the US. The house view on the bubbling trade war is that tariffs will be implemented on Friday, with rhetoric heightening between all parties until concessions are made. This scenario will see only the dollar and JPY benefit in the short-term, which has broadly been the case this far.

CAD. The loonie ranked among the top performers of the G10 currency board on Friday and moved away a bit from the one-year lows it made earlier during the week against USD. The Canadian dollar has been caught in a swirl of trade concerns, oil headlines and softer data lately, which have all contributed to the Bank of Canada extending their “wait and see” approach a bit longer. Nevertheless April’s Gross Domestic Product reading managed to please markets significantly, showing an above-expectations growth of 0.1%. The BoC Business Outlook Survey also suggests Canadian businesses remain positive about their prospects, with responses on most metrics above their long term averages, leaving the outlook indicator at the highest level since 2011. The only headline economic data to be released this week is on Friday, when employment and trade balance figures are due.

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