Morning Report, Tuesday the 6th of November

November 6, 2018

GBP. Sterling found itself in another classic Brexit spinning cycle with news on the UK being handed a concession by the European Union on the Irish border making headlines, only to be officially denied shortly after. In the end the Great British Pound managed to hold its helm straight and steer to the top of the G10 currency board. A below-forecast reading on October’s Service Purchasing Manager Index at 52.2 didn’t spoil the party for sterling, indicating that positive sentiment surrounding a potential Brexit deal remains the markets main focus. Today Theresa May holds a crunch meeting with her Cabinet to inform them a deal should be signed, sealed and delivered to the EU by the 29th of November.

EUR. Euro had a relatively fruitful start of the week, with the only significant terrain lost was against GBP, as improved Brexit prospects boosted both currencies. Italian budget negotiations are back in the headlines, with Italian Deputy Prime Minister Luigi di Maio, in an interview with the Financial Times, claiming that Italy’s fiscal expansion may be the new fiscal recipe for Europe for the coming years. This starts an interesting discussion, given that President Trump’s fiscal stimuli seems to have already served the US economy well, at least at the moment. Fanning the flames of this perspective is that while the US has been stimulating its economy despite a debt-to-GDP ratio of over 100%- higher than the 87% of the Eurozone as a whole- the eurozones largest economy, Germany, only has a debt-to-GDP ratio of 62%, indicating that they have plenty of room to spend more. Such fiscal expenditures can be a major boost for the single currency as the age of austerity ends on the continent. That said, it should be noted that Italy’s debt-to-GDP level is 130%, and the Bank of Italy does not hold the mandate to finance this debt in case of emergency by printing more money. Today sees Eurozone Final Services PMI at 9:00 GMT.

USD. The greenback was a bit soft yesterday as market participants adopt a “wait and see” approach before the US midterm elections that kick off today around lunch time in the UK. The base case scenario remains that the Democrats take the House of Representatives, while the Republicans are set to take the Senate. If Republicans win both houses, USD is expected to strengthen, although a double Democratic victory is expected to drag on the greenback. In the lee of all this electoral winds blowing over the country ISM Non-Manufacturing PMI put another beat on the boards coming in at 60.3, showing at least that purchasing managers have remained very upbeat on their business prospects since Trump moved into the Oval office.

CAD. On a day that saw low volumes being traded on the USDCAD pair the loonie restored with a seeming ease from a dip in the afternoon, ending virtually flat against the greenback on a day that contained few shockers. Bank of Canada Governor Stephen Poloz pushed back against criticism that the BoC’s policies are too aggressive by once again reiterating he sees household spending as “healthy” and income growth as “solid”. This can be taken as proof about how committed the BoC is to their hiking path, which should put some extra confidence in the faith of the loonie in coming months.

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