Morning Report: 28 June 2018

June 28, 2018

GBP. Sterling posted further losses against the dollar yesterday, falling almost a percent, whilst also losing ground against the euro. Yesterday’s release by the Bank of England of the semi-annual Financial Stability Report was actually fairly uneventful, with the headline takeaways being that the banking system could withstand a disorderly Brexit, meaning that the Bank of England will keep the countercyclical capital buffer at 1% and that domestic risks including Brexit remain “standard”. Nonetheless, markets seem content to keep GBP grinding lower in line with its trading patterns that have been established over recent weeks. Today, Prime Minister Theresa May joins other EU leaders today in Brussels where she is expected to explain the lack of Brexit progress, ahead of tomorrow’s EU leaders meeting which will discuss Brexit and the Eurozone.

EUR. With little released in the way of data yesterday, the euro followed other G10 currencies in losing ground against the US dollar, with little movement of interest elsewhere. Today marks the start of the European Council meeting, with leaders expected to arrive at 13:30 BST, which will focus on migration, security and defence, as well as economic and financial affairs. Angela Merkel will be keen to get a multilateral agreement by EU leaders to share the responsibility of immigration, stressing that frontline states share more of the burden. Merkel has been given one week by her interior minister, Horst Seehofer from the coalition CSU party, to secure an EU asylum agreement, before he defies her pre-existing open door policy and closes German borders to asylum seekers registered in neighbouring EU countries, risking a collapse of the tentative German coalition government. Political risk as these events unfold will likely be priced into the euro, as previously seen with events of political instability in Italy and Spain. Today at 13:00 BST, German Consumer Price Index is released, with a fall from 2.2% to 2.1% YoY for June expected.

USD. The USD surged yesterday, posting gains against the whole G10 currency board. The dollar composite DXY index reversed all of its losses after posting fresh 11-month highs last Thursday and has started today’s session on the front foot, reaching last Thursday’s highs. Yesterday, Donald Trump dropped plans to impose specific new restrictions on Chinese investment in the US and has decided instead to focus his efforts on legislation already going through Congress surrounding a ‘national security review’, which is, in part, designed to enhance protection of intellectual property developed by US firms. China took issue with the US plans of increased protectionism, and with the depreciation of the yuan over the last 10-days matching that of the 2015 devaluation, risks to an all-out trade war may intensify. The increase in global risk has bode well for the dollar recently and may continue as this week plays out. The third and final reading of US Q1 GDP figures is released at 13:30 BST today, with the posting likely to show no change from the previous 2.2%.

CAD. Despite a surge in USD strength yesterday, the loonie was one of the better faring currencies as oil prices began to rise yet again. With the US imploring its allies to end all crude imports from Iran by November 4th as US sanctions against the middle-eastern power rises, the impact on oil production looks set to negate nearly all of the production increase promised by OPEC last week.

UK news

  • Financial Times: Hammond urged to approve £100m for UK rival to Galileo. Greg Clark, the business secretary, has urged the Treasury to release £100m for a two-year feasibility study on a British satellite navigation system as a row grows with Brussels over access to the EU’s Galileo project.
  • Reuters: Migration challenge is make-or-break for EU, says Merkel. The European Union’s fate rests on its ability to rise to the challenges of the migration debate, Chancellor Angela Merkel told the German parliament on Thursday ahead of a crunch summit in Brussels that will be dominated by the matter.
  • Bloomberg: Xi Warns Mattis China Won’t Surrender ‘One Inch’ of Territory. President Xi Jinping told U.S. Defense Secretary James Mattis he wouldn’t give up any territory that China considered its own, an unusually blunt warning as security disputes simmer below a fight over trade.

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