Morning Report: Thursday 4th of October 2018

October 4, 2018

GBP. Sterling only lost out against the rampant dollar on a day on which Theresa May’s closing speech at the Conservative Party conference increased confidence in her position. May’s speech was not considered being disastrous – in sharp contrast to last year’s edition – and the fact that this is seen as a sterling positive is some sign about how high concerns about a potential leadership challenge have risen in markets. This would then further derail the Brexit process, extending the Brexit discount currently weighing on GBP. Services Purchasing Manager Index missed the mark by a whisker at 53.9.

EUR. The single currency made gains against USD early in the morning, only to gradually weaken to the greenback throughout the day. Eventually EURUSD did succumb to fresh lows, following another very upbeat speech by Federal Reserve Chair Jerome Powell yesterday afternoon. Elsewhere, the divergence between German and Italian Purchasing Managers Index scores subdued somewhat after the final readings for the Services sector came out below target for Germany at 55.9, while Italy’s print over performed at a score of 53.3. Retail Sales meanwhile disappointed and shrank by 0.2% in August, while the July reading was adjusted downwards to -0.6% as well. However, these figures don’t tell the whole story about spending as for example car sales aren’t included in the release. Car sales are actually expected to put a firm print on the board, ahead of new emission tests that came into effect on the first of September. Finally, Italian Finance Minister Geovanni Tria’s pledges to aim for a budget deficit of only 2% in 2020 and 2021 brought some solace to Italian debt markets, though they likely remain one of the main drivers for the euro for the rest of the week as well.

USD. The greenback had another cracker of a day as Federal Reserve Chair Jerome Powell displayed such positivity on the US economic outlook that he could make Mary Poppins appear like an embittered old lady in comparison. Needless to say, USD took the hint and the DXY dollar index rose for the sixth day in a row. Among other things Powell said “There’s really no reason to think that this cycle can’t continue for quite some time, effectively indefinitely” and that “interest rates are still accommodative, but we’re gradually moving to a place where they’ll be neutral”. He then added “We may go past neutral. But we’re a long way from neutral at this point, probably”. These remarks can be interpreted as a hint that the Fed is far from done with increasing interest rates, which boosts the attractiveness of the dollar as an investment. The increased expectations about rate increases in the coming year then eventually trickled through in 10 year US treasuries, which reached their highest yield level since 2011. Finally the ISM Non-Manufacturing PMI crushed expectations and came in at buoyant score of 61.6, hinting the US economic expansion has further legs to run, according to purchasing managers at least.

CAD. CAD completed the top three of the G10 currency board yesterday behind USD and GBP and remains the top performer of the G10 since Monday last week. Momentum after the new NAFTA treaty seems to be blowing in the widely spread out sails of the loonie, although oil prices residing near four year highs undoubtedly added some tailwinds as well. WTI popped above $76 yesterday, with Brent crude oil breaching the $86 level. Speculation of oil prices reaching $100 dollars a barrel is increasing now US sanctions on Iranian oil exports come into effect on the 4th of November. Higher oil prices due to a contraction in global supply can be another catalyst for loonie strength now the clouds of NAFTA uncertainty have lifted. The Ivey PMI at 15:00 BST will be the sole star of today’s data calendar.

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