News & analysis

USD

The greenback comfortably surfed the wave of risk-off sentiment that continued to roll over markets yesterday, which had it end stronger against most G10 currencies, bar JPY and GBP. The inversion of the yield curve did not halt its stride either as the spread between 2-year and 10-year treasury yields reached their highest level in 12 years. Exports and business investment in the US appear soggy -blame it on the trade war – which leaves only consumer spending and fiscal spending to support the economy. Of course, household consumption makes up for around 70% of the economy, with government spending adding another 20%, which makes the US economy appear pretty stable at the moment. However, consumers can be fickle and sensitive to a sudden mood change if the trade war starts to cause the first cracks in the US economy, while the loose fiscal policies of President Trump cannot continue indefinitely. These are major risks, which likely play a big role in the current yield curve inversion. Paradoxically, if a US recession coincides with a global economic contraction – completely plausible under the current trade uncertainties – the US dollar may still strengthen on the back of safe-haven flows.

CAD

The loonie approached a two week high against the US dollar yesterday, but saw a rapid reversal in its fortunes overnight, and gave back most of its gains from the week so far. Crude oil remained well bid overnight, however, suggesting that the loonie’s chances of resuming its rally should not yet be ruled out. No Canadian data will be released today, but US Crude Oil Inventories will be out at 15:30 BST.

GBP

Sterling strengthened yesterday, as the chances of a no-deal Brexit seemed to be falling through two channels. Major newspapers such as The Times and Wall Street Journal had reported earlier in the week that Boris Johnson’s trip to Berlin and France had been fairly well received by European leaders. Downing Street was reportedly preparing an offer to prevent a hard border in Ireland that included the UK remaining partially aligned with some EU standards – a major softening in the UK’s position relative to the benchmark demands of hardline eurosceptics. Elsewhere, opposition groups agreed on a legal approach to blocking no-deal that revolves around passing legislation as soon as Parliament returns from recess next week. This morning’s sole release of note was the British Retail Consortium’s Shop Price Index, which contracted by 0.4% year on year.

EUR

Yesterday saw a slow day for the euro, with the second consecutive day of declines versus the greenback established and 2-year lows on EURUSD never being far away. The German Q2 Gross Domestic Product was confirmed at a 0.1% contraction, which together with forward-looking business surveys mean Germany is likely in a recession at the moment. Italy then brings what must go for positive news in the Eurozone at this moment, with coalition talks between the anti-establishment Five Star Movement and the centre-left Democratic Party still ongoing. If these parties would eventually succeed in forming a government together, a fitting Autumn budget may be formed, which would prevent a consumption-hampering VAT rise to be implemented. Italian bonds so far display a starry-eyed optimism as the 10-year bonds enjoyed their best day in two months yesterday. The more sceptically inclined may remark the Italian bond rally is more a product of an environment in which further European Central Bank is considering new asset purchases, than that it roots in a sudden trust in the stability of Italian politics. Whatever the main driver, the euro looks, yawns and remains unmoved for now, as a trade war, Brexit and a German recession eclipse fears of what kind of budget plans Italian politics will produce in the coming months. The M3 Money Supply is announced at 9:00 BST, with Italian President Sergio Matarella potentially relying on large streams of espresso as he will be meeting with leaders of Italy’s main Political parties throughout the day.

 

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