Morning Report: 29 October 2018

October 29, 2018

GBP. Last week saw sterling bottom the G10 currency board as broad dollar strength coincided with domestic political uncertainty and stagnant Brexit developments. Sterling hit a new monthly low against the dollar, and this week’s data may prove ineffective in causing sterling to rebound. Today, at around 15:30 GMT, the final Budget prior to the Brexit deadline on March 31st will be released. May claimed at the Conservative party conference that austerity was coming to an end, but it is believed that this hinges on a no-deal Brexit not playing out. The Chancellor of the Exchequer is buoyed by an unexpected £13bn in extra tax receipts coming into today’s announcement. Sterling may find some solace in the expansion of government spending, boosting UK growth that looks set to moderate in the final quarter of the year, but the Bank of England will continue to remain on hold until Brexit uncertainty clears. This week’s BoE meeting can be interesting with the market looking at refreshed inflation forecasts in the inflation report, with growth in the UK looking slightly better, but with Brexit uncertainty still weighing. The key question that needs answering is if wage growth has taken the reigns from sterling’s previous depreciation in pressuring inflation domestically.

EUR. After a week of declines, the euro seemed to have woken up at the end of Friday afternoon as it started to rally after it became clear the S&P chose to not degrade Italy’s credit rating. The credit rating agency did put Italy’s BBB rating under review, however, and may downgrade Italy’s grade to BBB- in any forthcoming review. This morning a story appeared in the Italian newspaper “Il Messagero” that Prime Minister Giuseppe Conte is working on a proposal that should cut the 2019 deficit somewhat, which is positive news for Italian bonds and the euro. This week has two top-tier releases, with the first reading of Q3 growth on Tuesday and Flash Consumer Prices on Wednesday. The European Central Bank remained quite positive during its latest press conference last Thursday, especially on inflation, a view that may prove legit or take a hit after this week’s data.

USD. The dollar shrugged off last week’s tumultuous price action in equity markets and made ground against all G10 currencies with the exception of JPY over the weekly period. The broad dollar DXY index, which is a weighted average of the dollar against its main G10 trading partners, is reaching its yearly high seen during the Turkish lira crisis. Today, at 12:30 GMT, the Federal Reserve’s favoured measure of inflation is released for September. Following hawkish meeting minutes last week, Jerome Powell and co will hope today’s Personal Consumption Expenditure release confirms their hawkish stance. On top of today’s inflation release, the US data calendar is well-filled with CB Consumer Confidence on Tuesday, ISM Manufacturing PMI on Thursday and the cherry on top on Friday; Non-Farm Payrolls. If inflation overshoots the forecast 2.0% today, and wages continue to pick up on Friday with an expected 3.2% year-on-year growth, it is likely the DXY dollar index will begin to test August’s high.

CAD. Last week’s hawkish Bank of Canada release propped up the loonie against the greenback’s surging week, leaving USDCAD virtually unchanged over the course of the 5-days. Two data releases jump out in the economic calendar for the loonie this week; August’s Gross Domestic Product reading on Wednesday and labour market data on Friday which are both expected to be in line with BoC’s hawkish stance. BoC Governor Stephen Poloz speaks on Wednesday. Now WTI crude oil prices have retreated below the $70 dollar mark again last week, data and monetary policy can be another ace up the sleeve for CAD to strengthen.

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