Morning Report: 16 May 2018

May 16, 2018

GBP. Sterling contained its losses against the dollar yesterday better than most of the G10 currencies, with only CHF faring better. Unemployment data showed a minor increase in those claiming unemployment benefits for April, up from 2.4% to 2.5%, but growth in Average Weekly Earnings fell from 2.8% to 2.6%. Yesterday the Guardian reported that Theresa May announced plans to publish a Brexit White Paper, which sets out a “detailed, ambitious and precise” explanation of what the UK hopes the final deal will deliver, ahead of a critical Brussels summit next month. The blueprint is expected to include a plan for a customs relationship that avoids another hard Irish border. This comes despite May’s cabinet being bitterly divided over how best to achieve this.

EUR. The euro was among one of the biggest losers yesterday versus USD, with every G10 currency apart from NOK making gains against it. Yesterday saw clarification that growth in the Eurozone economy did indeed slowdown in Q1 to levels of 2.5% year on year, with GDP falling in Germany to 0.3% Quarter on Quarter from 0.6% in Q4 2017. In Italy, Five Star leader Luigi Di Maio said their policy platform had changed so that “many of the things which are making news won’t be in there”. This comes following reports by Huffington Post Italy that a draft demanded a €250bn ECB debt write off and plans for exiting the euro. To date, an Italian Prime Minister hasn’t been appointed, but there have been whispers of two academics being proposed to take the position.

USD. USD surged yesterday as 10 year Treasury yields reached their highest level since 2011, helping the dollar to strengthen across the global currency board. Retail Sales were a bit of a mixed bag though, totalling at 0.3% growth in April, below expectations, though the March readings were adjusted upwards. The Empire State Manufacturing Index, however, did unambiguously better than expected with a score of 20.1, with a higher assessment of current and expected business conditions by surveyed manufacturers. US economic calendar flows over today, with Building Permits and Housing Starts at 13:30 BST and the Capacity Utilisation Rate and Industrial Production at 14:15. Federal Reserve voting member Raphael Bostic will speak about the economic outlook at 13:30.

CAD. The loonie fared relatively well despite the sweeping strength of the dollar yesterday. A rise in oil prices came to loonie’s defence, with WTI oil prices reaching fresh post-2014 highs. Time seems to be up on NAFTA for 2018, as House of Representatives Speaker Paul Ryan had set an informal deadline for the 17th May for talks to conclude- in order that Congress has enough time to ratify a deal- but negotiations are still stuck on Trump’s demands on the auto industry. The Trump administration stands strong on their demand that 40% of each car will be produced north of the border, and bridging the ideological gap holds the key for a revised NAFTA deal being reached. Today sees March’s Manufacturing Sales out at 13:30 BST, which are expected to fall to 0.9% from February’s 1.9%.

FX Elsewhere. The unleashed dollar wreaked havoc in the world of emerging market currencies as rising yields, and a more expensive dollar endanger the profitability of ‘carry trades’, where market participants sell the US dollar and buy currencies with a higher rate of interest. South African Rand and Turkish Lira were among the ones most heavily hit in the firing lines, their losses exacerbated by idiosyncratic factors. In South Africa, Unemployment remained stubbornly high at 26.7% for the first quarter, while the Turkish President Recep Erdogan declared his intent to firm his grip on Turkish monetary policy after the elections on the 24th of June. This puts the independence of the Central Bank of the Republic of Turkey further at risk.

UK news

  • Financial Times: Leak of draft deal shows Italian populist parties sought path out of euro. Italy’s two leading populist parties, which are locked in talks to form a coalition government, want to return to a “pre-Maastricht setting” in European economic policy — before the introduction of the single currency and common fiscal rules, they said in a statement early on Wednesday.
  • Wall Street Journal: North Korea: We Don’t Want U.S. Summit Focused Only on Denuclearization. A senior North Korean official said Pyongyang isn’t interested in a summit with the U.S. focused solely on denuclearization and accused Washington of trying to “impose on our dignified state the destiny of Libya or Iraq.”
  • Reuters: Britain will not ask for longer Brexit transition period. Britain will not ask for an extension to the near-two year transition period with the European Union after Brexit when the government publishes its new detailed plans next month, Cabinet Office minister David Lidington said on Wednesday.

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