Morning Report: 26 July 2018

July 26, 2018

GBP. Despite parliament ending for summer recess on Tuesday, Brexit developments remain ongoing as Brexit Secretary Dominic Raab meets Michel Barnier today. Politico notes that Raab has met the EU’s Chief Negotiator, Barnier, more times in the last 8 days than his predecessor Davis did in 6 months. The UK’s Financial Service sector’s access to the single market will likely be on the top of the discussion list, as previous suggestions by the UK, such as “equivalence” of regulations, have been rejected. With no top-tier data released for the rest of the week, Brexit related headlines and the dollar move will dominate sterling’s price action.

USD. The possibility of a trans-Atlantic Trade War dwindled yesterday after the President of the European Commission, Jean-Claude Juncker, met with US President Donald Trump. The dollar broadly fell from the announcement that the EU would increase imports of liquified natural gas and soybeans from the US while both parties will “hold off on other tariffs” such as those on automobiles. The EU’s commitment to increase purchases of US soybeans may prove pivotal for the upcoming midterm elections, as Trump seeks to appease US farmers in the wake of agricultural tariffs being imposed. The announcement by the EU follows Tuesday’s headlines that stated the US government would issue farmers with a $12bn trade war bailout as Chinese tariffs start to take their toll. Soybean futures were one of the best performing securities yesterday, rallying 1.7%. Following the announcement, the broad dollar DXY index fell 50 basis points, whilst the greenback ended yesterday’s session in the red against the whole G10 currency board. Today’s release of Durable Goods Orders at 13:30, which is an indicator of consumer sentiment as it tracks domestic investments in goods such as fridges and washing machines, may see the dollar pare some of yesterday’s losses ahead of Friday’s much anticipated Gross Domestic Product Release.

EUR.  Euro was shaken alive from a quiet session by the unexpected conciliatory tone in the Juncker-Trump meeting, which instigated a euro rally late in the US session. The move on the EURUSD pair can be seen as an unwind of the earlier safe-haven flows that mostly benefited dollar. As the threat of a full-on trade war seems to have lessened somewhat, haven currencies are also less in demand. The German Ifo Business Climate meanwhile came in virtually on target for July with a score of 101.7, which indicates that the decrease in economic sentiment in the Eurozone may have bottomed out. Also, the M3 Money supply grew at a faster pace than forecast, which has the potential to boost inflation. Whether this is enough to put the European Central Bank on a more aggressive hiking path this afternoon remains to be seen, as unconvincing economic data combined with a stubbornly soft core inflation give the ECB every reason to practice patience in this regard. Especially given that the ECB already had a historical meeting last time in June in which it announced the end of the Asset Purchasing Program, we may be in for a less memorable episode today. The Main Financing Rate is made public at 12:45 BST, with all eyes switching to the Press Conference at 13:30.

CAD. The loonie suffered heavily over the last few weeks due to the trade threats flowing out of the US, but tasted something of a sweet gratification as the Eurozone and the US eased some of their trade frictions and CAD suddenly became a collateral benefactor of this. Meanwhile, Canada’s Foreign Minister Chrystia Freeland forged stronger bonds with Mexico’s  Foreign Minister Luis Videgaray in a meeting in Mexico City, which had the Canadian and Mexican representative conclude that for them NAFTA was still a trilateral treaty, not to be replaced by bilateral deals. Their level of unitedness will make both countries stand firmer against the US, which has recently come to question the NAFTA treaty.

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