Morning Report: 17 May 2018

May 17, 2018

GBP Sterling made concessions to USD yesterday but did see some progress against the euro. With no data released and disregarding Theresa May accidentally committing the UK to a customs union- rather than the default line of ‘customs arrangement’- during Prime Minister’s Questions yesterday, the most notable story for sterling was the announcement by Theresa May that a Brexit White Paper will be released. The White Paper will extend to over 100 pages, outlining the UK’s plans on what a final deal will look like, and will involve reaching an agreement with almost every government department. Further, with Bank of England Governor Mark Carney set to leave his position until June 2019, a possible front-running candidate, Raghuram Rajan, has publicly stated he will not apply for Carney’s position when the job is advertised later in the year.

USD Although the greenback slowed down its pace of advance, it remained on the offensive against euro and sterling, though CAD and AUD managed to pare some earlier losses. US ten year treasury yields broke through the 3.1% level, reaching another 7 year high and bringing some strength to the US dollar. Industrial Production rose more convincingly in April than expected at 0.7%, while also the March reading was adjusted upwards. Capacity Utilisation rates climbed to their highest level since March 2015 at 78%, further indicating slack is disappearing out of the industrial sector. This is still 1.8% below the long-run (1972-2017) average. Chinese vice-premier Liu He is in Washington this week to discuss trade with US officials, potentially offering some USD-relevant headlines.

EUR Euro saw losses against the dollar for the third day in a row yesterday and ended at the bottom of the league of G10 currencies. A leaked paper indicated that newly to-be-formed Italian coalition intends to ask the European Central Bank to write off €250 billion worth of Italian debt, although Five Star leader Luigi Di Maio said the paper was out of date. This sent yields on Italian ten year government bonds to their highest level in seven months and put some pressure on euro. Meanwhile, the Final Eurozone Consumer Price Index release for April was slightly snore-inducing, coming in bang in line with expectations at 1.2%, with the core reading a thin-looking 0.7%. Today sees the Italian Trade Balance at 9:00 BST, which is likely to show the surplus that has become a standard for Italy over the last years.

CAD CAD joined other resource sensitive currencies in their rally yesterday as oil prices picked up later in the US session. The loonie appears strikingly calm in the face of an informal NAFTA deadline set by US speaker of the House Paul Ryan, despite the Mexican Economy Minister Ildefonso Guajardo being very sceptical about such progress in comments made yesterday. Manufacturing Sales appeared in good health yesterday, as the March edition came in stronger than expected at 1.4%, while the February reading was upgraded to 2.7%. Today Foreign Security Purchases are published at 13:30 BST, while also oil and NAFTA negotiations remain in our focus.

FX Elsewhere Back to Argentina, with the peso making much needed gains on Tuesday, but resuming its trend of depreciation yesterday. Notably, despite the peso losing out to the dollar yesterday, USDARS didn’t reach the highs it set on Monday. The peso made these gains on Tuesday due to the issuance of $3bn worth of 5 and 8 year government bonds receiving an influx of demand, mainly due to investment firm Franklin Templeton snapping up three quarters of those issued. The $3bn Bote sale arranged by Franklin Templeton represents a vote of confidence in Argentina, and this increase in investor confidence resulted in peso strength on one of the worst days for emerging markets this year.

UK news

  • Financial Times: US and EU head for showdown over shutting Iran off from finance The US and EU are heading for a showdown over how to handle one of the linchpins of the global financial system following Donald Trump’s decision to re-impose sanctions on Iran.
  • Reuters: Italy – Eurozone braced for next challenge Italy’s 5-Star Movement and the League are now seen close to signing off on a radical government pact that will set Rome up for a likely showdown with the European Union over spending plans that will bust the eurozone’s deficit rules.
  • Reuters: South Korea to play “mediator” to resolve North Korea-U.S. summit doubts South Korea said on Thursday it would seek to mediate between the United States and North Korea after Pyongyang threatened to pull out of an unprecedented summit between its leader Kim Jong Un and President Donald Trump on June 12 in Singapore.

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