Morning Report: 18 May 2018

May 18, 2018

GBP. Sterling was the sole currency to make gains against the dollar out of the G10 currencies yesterday, after jumping in the early hours of the morning but modestly paring gains as the day went on. The news of the day came in the way of a “backstop” being agreed by Ministers, which would see the UK match EU tariffs after 2021 if no favourable deal on a customs arrangement is reached. The backstop would extend the UK’s transition period if the Irish border debacle could not be sorted.

EUR. The greenback is on course for its fifth consecutive week of gains for the DXY index after more broad progress yesterday. US 10 year yields once again reached new highs yesterday, and continue to be viewed by many as one of the main drivers of the recent dollar comeback. China’s Vice Premier Liu He met with Trump yesterday and promised him to reduce the US trade deficit with China by $200 billion by buying more American products. The yuan weakened at the prospect of how this would erode China’s trade surplus, though overall the news was seen as positive for global trade. Except for a speech by Federal Reserve’s Lael Brainard at 14:15 BST, the US data calendar remains empty.

USD. After a hopeful start in the morning yesterday, euro eventually lost momentum and had to swallow a fourth day of losses to USD. The newly formed Italian coalition government seemed to walk back demands for debt forgiveness, instead asking for different treatment of Italian debt by the ECB. Transforming demands for debt write-offs into something of a paper tiger reassured sovereign debt markets somewhat and helped Italian sovereign to rally. The proposed accounting changes, which would enable Italy to take on more debt, were received with suspicion by many observers. Today at 9:00 BST Eurozone Current Account data will be released, followed at 10:00 by Trade Balance.

CAD. The loonie couldn’t fully profit from the new Brent crude oil highs above $80 a barrel and eventually ended up in the middle of the G10 currencies versus USD. Crude prices are trending upwards solidly and may find further support from US sanctions on Iran. This may further strengthen the loonie, but whether this strength will be sufficient to counteract the current USD trend is yet to be seen. Donald Trump’s Chief NAFTA negotiator said the US, Canada and Mexico are “nowhere near close to a deal”, reiterating the Mexican President’s scepticism yesterday. Inflation measures, such as the Consumer Price Index, and Retail Sales are released today at 13:30 BST.

UK news

  • Financial Times: Theresa May concedes on customs union until Irish border resolved. The whole of the UK will remain tied to a customs union with the EU after 2021 until an alternative to having a hard border in Ireland can be found, Theresa May has conceded.
  • Wall Street Journal: Trump Offers North Korea’s Kim Political Safeguards, but Warns of ‘Total Decimation’. President Donald Trump acknowledged new doubts about the fate of his coming meeting with North Korean leader Kim Jong Un, expressing surprise over the uptick in harsh language from Pyongyang while shifting blame to China for the latest uncertainty.
  • Reuters: Italian parties agree government programme, say no threat to euro. Italy’s two anti-establishment parties agreed the basis for a governing accord on Thursday that would slash taxes, ramp up welfare spending and pose the biggest challenge to the European Union since Britain voted to leave the bloc two years ago.

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