Morning Report: 15 May 2018

May 15, 2018

GBP. Sterling was the only G10 currency to make gains against USD yesterday despite little headline data. Today sees the release of labour market data for the UK at 9:30 BST, with both the Claimant Count and ILO measure of unemployment released alongside Average Weekly Earnings. With unemployment at historic lows, conventional economic theory would expect wage growth to pick up in real terms. However, wage growth didn’t increase in the three months up to March despite employment growth exceeding forecast at 197k. Wage growth is certainly a key expectation of the Bank of England’s recent inflation report Inflation Report. The Report expects labour costs to increase and therefore put upward pressure on inflation – which has recently seen a fall to 2.5%.

USD. The dollar nearly had a clean sweep of the G10 currencies yesterday, with sterling the lone winner. The greenback made its biggest gains against NZD and SEK yesterday and saw broad strength despite comments from Wilbur Ross, US Commerce Secretary, stating that the US and China are still wide apart on trade negotiations. The US yield curve will be back under the spotlight today as Fed officials Robert Kaplan and John Williams speak today at 13:00 and 18:00 BSTrespectively. The short term 2 year yield has fallen recently after rising bond market expectations of Fed hikes outstripped predictions made by the FOMC’s own “dot plot” projections. However, scepticism still remains over the longer term economic outlook, and so longer run yields have been more sluggish to rise. Market participants keep a firm eye on the yield curve due to it being a general precursor to recessions. Today see’s US Retail Sales reported at 13:30 BST, this will be a key indicator as to whether the consumer soft patch in Q1 was a limited event.

EUR. Yesterday the euro made minor concessions to the dollar with only the Eurozone Survey Report being released. The Survey Report suggested that Eurozone growth will fall below 2% by 2020. German Q1 GDP was released earlier this morning, prior to the Eurozone area’s GDP at 10:00 BST, and saw growth fall to 0.3%. This was below both the consensus of 0.4% and below Q4 2017’s figure of 0.6%. With Germany being the Eurozone’s largest economy, it doesn’t paint a rosy picture for the second reading of the Eurozone area’s growth, which may well see a downward revision from 2.5%. German ZEW Expectations Survey is also released at 10:00 BST.

CAD. The loonie had a generally uneventful day yesterday, extending the mild losses it made after reaching a high for the month against USD on Friday. Crude oil prices resumed their relentless upwards trend, but this did little to help the loonie. No headline data will be released today.

FX Elsewhere. The Argentinian peso took another major blow yesterday, falling some 6% on open. With no word from the IMF over the weekend, the Central Bank of Argentina (BCRA) was said to have offered a further $5bn in the peso market at a rate of 25/$1 whilst also adjusting liquidity requirements for banks. This comes after a previous intervention by the BCRA in which they offered $5.5bn last week. USDARS stabilised at higher levels on close, as the IMF’s Director of Communications announced the IMF is setting a fund board meeting for Argentina on the 18th May, to discuss the form in which a loan would take. The decline, which was seemingly sparked by a new 5% income tax on non-residents holdings of central bank debt, looks like it can only be stemmed by further intervention by the BCRA in the market given their currency reserves increase.

UK news

  • Reuters: Elusive peace grows more remote with U.S. Jerusalem embassy move, violence. The move of the U.S. Embassy in Israel to Jerusalem, coupled with the killings of dozens of Palestinian protesters on Monday, makes the odds of a U.S.-brokered peace even more remote, analysts said.
  • Financial Times: Erdogan vows to take greater control of Turkey’s monetary policy. The Turkish lira hit a new record low on Tuesday after Recep Tayyip Erdogan vowed to take greater control of monetary policy if he wins elections next month.
  • Wall Street Journal: U.S., China Discussing Deal on ZTE, Agricultural Tariffs. The U.S. and China are closing in on a deal that would give China’s ZTE Corp. a reprieve from potentially crippling U.S. sanctions in exchange for Beijing removing tariffs on billions of dollars of U.S. agricultural products, said people in both countries briefed on the deal.

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