Morning Report: 23 October 2018

October 23, 2018

GBP. Domestic political uncertainty weighed on the pound yesterday resulting in sterling performing the worst out of the G10 currencies against the dollar. Solace doesn’t look in sight for sterling as Theresa May is expected to plead for her job in front of the 1922 committee on Wednesday. With letters from MP’s declaring no confidence in May piling up on the committee’s desk, it may be time for the PM to dance her way out of Downing Street. Sterling’s reaction yesterday was muted should such volatile politics take place, as without May, a power vacuum is created within the leading party. MP’s last week suggested that David Davis, the former Brexit Secretary, is the prime candidate to be interim PM but the jury is still out. Can May cling onto power yet again? This is the question both sterling traders and UK citizens are asking alike. Expect continued volatility in the pound on the back of these political developments this week.

EUR. EUR came under pressure yesterday after the new Italian government doubled down on the 2.4% budget deficit for 2019. Minister of Finance Geovanni Tria addressed a letter to the European Commission explaining these expenditures are needed to spark the Italian economy into life after a growthless decade. The reactions from other European Union member states so far can hardly be called encouraging, with for example Austria’s Finance Minister Hartwig Löwer commenting that Italy’s debt policy is “taking the EU hostage”. As both sides seem to harden their stances, a quick resolution seems unlikely, with uncertainty likely to continue to keep EUR gravity bound. Today a more elaborate reaction of the EC on the Italian budget may follow, possibly with potential consequences outlined if the Italians do not desert the more ambitious parts of their spending plans.

USD. The dollar had another stormer yesterday, with CAD the only G10 currency posting minor gains and CHF trading flat. The current political uproar over the “Caravan”, as Trump puts it, only plays into his hands prior to the November mid-term elections in two weeks. If the Democrats take the Congressional house in the mid-term elections, Trump’s political agenda could be blocked and grind to a halt altogether for the second half of his term. With thousands of Hondurans reportedly making their way through Mexico to the US-Mexico border, Trump has used this migration to reassert his promise of tougher immigration laws and remind the public to vote in two weeks’ time. Current events are likely going to give the Republicans a last bout of momentum, and the dollar looks like it has responded to the reduced risk of a political lock-out.

CAD. The loonie was the only G10 currency yesterday to hold off a surging dollar. With no data released and oil prices flat, one can only speculate that anticipation for a hawkish Bank of Canada rate announcement Wednesday fended off the greenback. USDCAD still remains near 5-week highs, which it has failed to break over the last 3 trading days suggesting that maybe this is a top for the pair for now. Wednesday’s meeting holds the key for the loonie. With the rate hike itself expected to have a muted effect, any hawkish tones from Poloz or the BoC regarding a fully-fledged hiking cycle are likely to shave a few points from USDCAD.

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