Morning Report: 22 June 2018

June 22, 2018

GBP. Sterling made some much-needed gains against the dollar yesterday after carving out fresh lows for the year over the past few days. A change in voting behaviour from the Bank of England’s Chief Economist, Andy Haldane, who voted for rates to increase, started sterling’s rally yesterday. The confidence with which the MPC has made this judgement, and looked past the shadier patches of UK data, suggests that the committee is developing a mild hiking bias. The latest meeting minutes saw the Monetary Policy Committee looks through negative data such as subdued services inflation and lacklustre business investment, whereas a more dovish committee would have pointed to this in order to explain their decision to hold. This suggests a hawkish bias to the committee has started to emerge and the markets 68% implied probability of an August interest rate hike now looks well founded.

EUR. Euro proved to be the comeback kid of the G10 currency board yesterday with a fierce rally against USD after an initial slump during the morning hours. The appointment of the two eurosceptics on important parliamentary committees in Italy increased political risk, which first put Italian government bonds under pressure, and afterwards dragged on the euro. Alberto Bagnai was appointed to head the Finance Committee of the Senate, and Claudio Borghi secured the leadership position of the Budget Committee in the lower house of parliament. The primary driver of the afternoon euro rally seems hard to pin down, but profit-taking, after the EUR failed to break a key support level, was likely a factor. Additionally, Greece’s Eurozone lenders handed the country some further breathing space by easing some of the repayment terms the country faces on its debt. Today sees Flash French Purchasing Manager Indices at 8:00 BST, followed by their German and Eurozone equivalent at 8:30 and 9:00 respectively. These releases should give us some insights into how the Eurozone economy is likely to develop over the summer.

USD. The US dollar came under pressure yesterday during the afternoon, and still appears a bit groggy this morning, although a fresh 11 month high on DXY dollar strength index- which is a weighted average against its six major trading pairs- was still reached. The Philly Fed Manufacturing Index came in way below expectations at 19.9 in June, while also the Conference Board Leading Index showed itself from its soft side for May with a growth of merely 0.2%. This set off a patch of dollar weakness in the afternoon of yesterday’s session, seeing DXY closing far lower than the highs reached that day. Meanwhile, trade tensions refuse to abide, with a Chinese spokesperson stating that China is “fully prepared” to respond to any new US tariff packages.

CAD. With USDCAD carving out fresh 11-month highs every day this week, the loonie has started today’s session on the offensive ahead of OPEC’s meeting in Vienna and Consumer Price Index Inflation measure released at 13:30 BST. Inflation is expected to increase for May from 2.2% to 2.6%, whilst the Bank of Canada’s multiple Core CPI measures are expected to be unchanged. Should Core CPI post a positive surprise, markets expectations of a rate hike from the Bank of Canada in July will certainly increase, with the market already pricing in a 64.7% probability for a hike. Rhetoric between Saudi Arabia and Iran over production increases has seemingly died down ahead of today’s OPEC meeting, with reports suggesting a 1 million barrel per day increase has been agreed on by all parties. This level of increase should just cover Q3’s expected demand increase, which should keep oil prices at this sustained higher level.

UK news

  • Financial Times: Airbus warns ‘negative’ impact of Brexit threatens its UK future. Airbus has threatened to pull out of the UK after warning that, under “any scenario, Brexit has severe negative consequences for the UK aerospace industry and Airbus in particular”.
  • Bloomberg: Turkish Lira Traders Brace for a Tumultuous Week After Elections. Investors are bracing for a big move in the Turkish lira after this weekend’s election and they’re paying to protect themselves. As Turks prepare to go to the polls on Sunday, the cost of hedging against fluctuations in the currency over a one-week period is trading close to the highest since the global financial crisis. Options that expire on Monday are pricing in at least a 2 percent move in the lira in either direction.
  • Wall Street Journal: Big Banks Clear Fed’s Stress Tests. The Federal Reserve determined the largest U.S. banks were healthy enough to withstand a severe economic downturn and would continue lending during a crisis, as the industry posts record profits and prepares for a wave of regulatory relief.

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