Morning Report: 8 June 2018

June 8, 2018

GBP. Sterling made minor gains against the dollar yesterday in another day of sparse data. Yesterday Bank of England Deputy Governor Dave Ramsden said recent data supported the central banks view that Q1’s sharp slowdown in growth would prove temporary. Ramsden went on to say that a period of weak growth in wages appeared to be coming to an end. The recent pickup in consumer confidence, credit and retail sales shows the British consumer may stimulate growth in the UK economy once again. With inflation readings, unemployment data and retail sales for May released next month, market expectations of a rate hike from the BoE in August will increase should further positive releases occur. In politics, Prime Minister Theresa May buckled under pressure from her inner Brexit cabinet, specifically pressure from Brexit Secretary David Davis, and published the government’s proposal for a Brexit backstop that included a specific time limit. The contentious draft plan proposes that the safety net, should a solution over Northern Ireland’s border not be found, will not see the UK be part of the customs union past December 2021. Today at 09:30 BST, the Bank of England will publish its Consumer Inflation Expectations survey.

EUR. The single currency advanced for the fourth day in a row against the US dollar, although it made concessions against haven currencies like JPY and CHF. Bonds in the Eurozone were under pressure for the second consecutive day, as markets started to prepare for the possibility that the European Central Bank will announce a tapering of its Asset Purchasing Program in its meeting next week. French President and German Chancellor, Emmanuel Macron and Angela Merkel, will be meeting G7 counterparts in Quebec over the next 48 hours, with both heads of states being vocal opposition of the US’s imposition of steel and aluminium tariffs and their withdrawal from the Paris Climate Accord. This morning both the French and the German Industrial Production shrank unexpectedly in April with 0.5% and 1.0% respectively, signalling a slow start to the second quarter of the Eurozone.

USD. The greenback posted gains against NZD, CAD and AUD yesterday but lost out to other G10 currencies, with the DXY index down for the 4th day in a row. Unless the composite dollar index rallies more than 0.78% today, the previous trend of 7 consecutive weeks of broad dollar strength will come to an abrupt end. Yesterday’s data didn’t contribute much to the direction of the greenback, as rhetoric from G7 leaders intensified in the build up to today’s summit in Charlevoix, Quebec. French President, Emmanuel Macron, spoke alongside his Canadian counterpart, Justin Trudeau, saying that they will push back against Trump’s “America First” policies. Macron went on to reinforce that the collective market of the remaining G6 countries is greater than the US’s following Trudeau stating that the G6 leaders are happy to sign an agreement without Trump if needs be.

CAD. The loonie lost out to USD yesterday, helped along by comments from Bank of Canada Governor Stephen Poloz. Poloz spoke yesterday in Ottawa following the BoC’s semi-annual Financial System Review, with the main takeaway being the insight he gave into the Governing Council’s outlook. Poloz stated that the GC’s confidence around the outlook of the Canadian economy has continued to improve at the margin, with growing confidence in inflation and wage growth. However, increased trade tensions weighed on their outlook for growth in the Canadian economy, with trade feeling more risky after tariffs. Poloz stated that July’s forecasts are expected to incorporate these protectionist government policies. The money market currently implies a 71.6% probability of a rate hike in July, but the likelihood of further rate hikes may have taken a hit. Unemployment data is released today at 13:30 BST.

FX Elsewhere. The Turkish lira displayed an impressive rally yesterday after the Central Bank of the Republic of Turkey unexpectedly increased the 1-week repo rate by 125 basis points to 17.75%. The CBRT also added that further steps will be taken, if necessary. This signals that President Erdogan either loosened his grip on the CBRT, changed his mind or that the CBRT was more independent than market participants thought all along. The willingness of the CBRT to interfere may put a floor under the Turkish lira, which will be very much welcomed by the corporate sector. This because the sector has a large exposure to currency swings because of its debt denominated in foreign currencies.

UK news

  • Financial Times: Boris Johnson blasts Treasury as ‘heart of Remain’ Boris Johnson has been secretly recorded accusing the Treasury of being “the heart of Remain” and trying to ruin Brexit by keeping Britain close to the EU’s customs and regulatory regime.
  • Reuters: G7 leaders set to clash with combative Trump over tariffs, trade Leaders of the Group of Seven rich nations are set to clash with a combative U.S. President Donald Trump on Friday when they pressure him to lift sanctions on steel and aluminum they fear could lead to a trade war.
  • Reuters: European shares fall in broad sell-off as ECB meeting looms European shares fell on Friday in a broad-based sell-off ahead of a European Central Bank meeting next week that could signal plans to wind down a massive monetary stimulus that has been supporting equities in the region.

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