Morning Report, Thursday the 6th of September 2018

September 6, 2018

GBP. For the second time in as many weeks, sterling rallied sharply yesterday on hints that progress is imminent in Brexit negotiations. The scoop reported by Bloomberg cited people familiar with the matter saying that Germany and the UK are prepared to fudge the current October deadline by dramatically dialling back the scope of the initial agreement on the UK’s relationship with the EU. Not long after the report, German authorities denied their position had changed. The strong market reaction to the news is a good indication of sterling’s potential to rally if any kind of Brexit deal, however sparse, is agreed upon. A positive Services Purchasing Manager Index reading had offered some measure of optimism earlier in the day, reading 54.3 for August and featuring reports of increasing labour market tightness.

EUR.  The euro fared well yesterday after sentiment on the new Italian budget improved. A renewed pledge of the new government to stick to European budget rules buoyed Italian debt markets, with Italian 2-year government bonds continuing their positive September momentum and even momentarily diving below 1%. This shows investors require a lower risk premium for holding these Italian government debt instruments, suggesting that fears about an exploding Italian deficit seem to have abided somewhat. The Eurozone Final August Services PMI came in bang on target at 54.4, while Retail Sales in July shrank a tad more than expected at 0.2%. Today’s data so far paints a gloomy picture for the manufacturing prospects of the Eurozone, as the Germany Factory orders in July unexpectedly went down by 0.9%.

USD. The greenback had a mixed day yesterday, weakening against GBP and EUR, despite performing well against several emerging market currencies. Yesterday’s mixed USD performance came despite this week’s good data flow, suggesting that markets are already expecting strong growth and higher rates from the US, and further outperformance will be needed for USD to maintain its upwards trend. US Trade Balance data came in at a deficit of 50.1 billion for July, a five month high powered by surging imports. Today sees the revised second quarter Unit Labour Costs at 13:30 BST, followed at 15:00 by the ISM non-Manufacturing PMI.

CAD.The loonie traded flat against USD yesterday, falling back against other G10 currencies as a result.The Bank of Canada kept its rates unchanged in its Rate Announcement yesterday, while maintaining an optimistic tone on the economy that suggested another hike remains likely this year. Canada’s Trade Deficit further shrank and is now but a hair away from a neutral balance at a -0.1 billion July. Today at 13:30 BST Building Permits will be published, while at 19:30 BoC Deputy Governor Carlolyn Wilkins will speak.

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