Morning Report: 21 November 2018

November 21, 2018

GBP. Sterling enjoyed another day out of the spotlight yesterday, as Brexit newsflow reverted to mean levels. A few headlines flew back and forth while journalists made jabs at May’s Eurosceptic Conservative Party opposition for their failed rebellion. Jacob Rees-Mogg maintained a bellicose tone, saying that May needed to be deposed or she would lead the Tories into the next election. Bank of England decision-makers including Mark Carney and Andy Haldane testified on the Bank’s latest forecasts to the Treasury Select Committee. The Bank’s imminent analysis of the economic effects of Theresa May’s EU deal was a major topic of conversation, as expected, with Carney saying that the deal would “support investment”. Carney was unequivocal about the economic risks of a no deal exit in March, which also came as no surprise to the market.

EUR. Markets may have gotten a little squeaky yesterday about a clash between the European Union and Italy as no conciliatory tones have been struck so far by either party about the heavily disputed Italian budget. As a result, EUR came under strong pressure from the dollar and pared advances made on Friday and Monday. The spread between the Italian and the German 10-year government bond yields, a common measure for the risk of Italians not repaying their debts, continues to reside near 5-year highs. The Financial Times manages to distinguish a bright spot in the darkness, as they note this has increased, but “isn’t blowing up to crisis levels”. The risk remains, however, that it does, which will put a lid on the prospects of a euro rally if no compromise is found. Brussel’s verdict and possible news of Italy winning an exclusive, but not-so-voluntary, ticket to the EU’s “Excessive Deficit Procedure” is expected around 12:00 GMT.

USD. The greenback was well bid against the other major currencies yesterday, only paring its gains slightly overnight. The US dollar generally makes ground when oil prices start to weaken, but discounting the effect to headline inflation, this may see production begin to increase further in the US economy. This may start to worry the Federal Reserve as they continue their efforts to cool down a very hot US economy before significant effects of overheating start to show. This may see Vice Chairman Clarida blush as he recently stated the Fed was close to their neutral rate, prompting markets to slash their expectations of 4 hikes next year. For now, the dollar has started to claw back some losses from the last few days, but still remains quite the distance from last week’s 16-month high.

CAD. The loonie has been under pressure over recent weeks with the slide in crude oil prices, and with yesterday’s dramatic $4 drop in the price of a barrel of Western Texas Intermediate crude, the loonie got whacked a further percentage point against the greenback. The validity of Saudi Arabia’s claims to reduce production, after exemptions to Iranian trade restrictions were given to US allies reliant on imported oil, to stem the recent oil slump is being brought into question. OPEC meet in Vienna on the 6th of December, but with the current slide in oil prices showing no sign of easing just yet, the Canadian economy may have to come to the loonie’s rescue on Friday.

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