Morning Report: 30 May 2018

May 30, 2018

GBP. Sterling lost ground to the dollar yesterday with Brexit headlines dominating UK specific headlines, although most losses came as markets re-evaluated positions based on increased political risk within the Eurozone. Doubt has been cast over Theresa May’s deal on using technology to overcome the Irish border situation, with manufacturers claiming similar technology used at the US-Canadian border has been in use for around a decade with only 100 companies subject to fast-track use.

EUR. Euro lost out against the dollar for the third consecutive day and performed particularly badly versus haven currencies like JPY and CHF. Banks across the continent with large Italian bond holdings were hit hard due to concerns over the stability of Italian debt, with UniCredit, Santander, BNP Paribas and Commerzbank among the biggest losers. Italy may be heading to the ballots as early as July and polls suggest the backing of the Eurosceptic Five Star Movement and League have increased as of late. This occurred after President Sergio Mattarella blocked the appointment of Paolo Savona as Finance Minister, which some view as undemocratically blocking the new coalition from taking power. Data provides a rare ray of hope for the single currency amidst political turmoil, with April German Retail Sales vastly outperforming expectations and expanding by 2.3% and Spanish Consumer Price Index higher at 2.0%. German Preliminary CPI data is released per state throughout the morning.

USD. Only JPY and CHF made gains against the dollar yesterday as global risk-off sentiment rippled through the market. US Treasuries benefited greatly from participants diminishing risk appetite, with 10-year yields falling 15 basis points – its strongest rally since the Brexit result – to below the 3% level it recently broke. The US equity market didn’t fare as well, with the Italian political crisis jumping the Atlantic for the first time, with banks such as JPMorgan, Citigroup and Bank of America posting losses of 4% or more, weighing down the S&P 500. With Eurozone political risk rising, the impact of data releases on the market were rendered near obsolete yesterday, however, the second reading of US Gross Domestic Product is released at 13:30 BST today with the median forecast of no revision at 2.0%.

CAD. The loonie resided in the middle of the pack of G10 currencies versus the dollar, losing out against USD, CHF and JPY, but making inroads against all others. Canadian Prime Minister Justin Trudeau showed he is willing to play hardball over NAFTA by saying that no deal is preferred to a bad deal for Canada. After the 6% drop in WTI crude oil prices over Friday and Monday, oil prices restored somewhat yesterday, lending CAD some strength. Today at 15:00 BST sees the Bank of Canada Rate Statement and Overnight Rate announcement, in which the BoC’s assessment on wage growth and trade negotiations will be closely watched.

FX Elsewhere. Japan extended its gains yesterday as it continues to be the best performing G10 currency against the dollar this year. The impetus to the yen’s strength was twofold yesterday. Firstly, the yen benefitted from a safe haven effect as European political risk heightened, with investors fleeing from poor performing emerging markets and Southern Europe, and sought safety in cash and low risk fixed income securities. Secondly, geopolitical risk eased in Asia with Trump taking to his trustworthy reporting tool: Twitter. He tweeted that Kim Young Chol, the Vice Chairman of North Korea, is currently in New York to discuss the historic summit that was called off last Thursday and that the US are continuing trade talks with China. JPY is currently the only G10 currency to make gains against the greenback this year, currently appreciating 3.55% to date.

UK news

  • Financial Times: Italian populist parties rekindle talks to form government. Italy’s anti-establishment political party Five Star Movement and the far-right League have been plunged back into talks to form a coalition government in an attempt to avoid a new election as early as July and further market turmoil.
  • Bloomberg: Italian Bonds Rebound Before Auction That’s Seen as Litmus Test. Italian bonds rebounded after Tuesday’s unprecedented sell-off ahead of a debt auction that will be a key test of investor appetite.

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