Option markets turn optimistic on sterling prospects
February 22, 2019
Sterling continues to float in anticipation of the next Brexit headline. With little changes thus far, Prime Minister Theresa May has until Wednesday to realistically strike concessions on the Irish backstop before facing a possible revolt in Parliament. Maintaining the topic of revolts, this morning Jeremy Corbyn was told to back a second referendum over May’s deal or face further defectors to The Independent Group. Despite sterling remaining relatively muted over the last few sessions, options markets are becoming increasingly bullish as the price of upside protection over the course of a week for the pound has increased. This is the first time protection against sterling appreciation has been more expensive than downside protection since mid-January, despite comments from Cabinet stating that a deal is unlikely to be reached by this time next Friday.
A schism formed yesterday – hardly the first in the history of the Eurozone – but as it was between Manufacturing and Survey data performance as opposed to politics, the euro ended up performing fairly well. The Composite Eurozone Purchasing Manager Index rose to 51.4 in February, with a constructive 52.3 figure from the Services sector superseding a Manufacturing sector that may have slipped into a recession with a PMI level of 49.2. The surface story tells us this is due to strengthening domestic demand, while a weaker foreign demand for exports highlights the external sector may be the main culprit of the Eurozone’s recent economic slowdown. The caveat is that the weaker activity in the manufacturing sector is also caused by weaker demand for manufacturing products from within the Eurozone. However, as the services sector is almost three times as large as the industrial sector, on a balance this development still seems positive for the Eurozone – and thus for the euro. Today’s German Ifo Business Climate at 9:00 GMT and Final Consumer Price Index Readings at 10:00 will be the main economic data events.
The broad dollar index has been trading in a cautious mood lately, with markets reading signs that the economic slowdown might be already filtering in the US. Yesterday, the release of the Markit Manufacturing PMI disappointed expectations, with a 16-month record low index at 53.7 falling short of the January print at 54.9 and the median forecaster expecting 54.8. Services and Composite PMIs, in turn, showed more optimism, coming out at sound 56.2 and 55.8 levels respectively. However, the good spirit in US-China trade talks may be doing the bulk of the job, prompting risk appetite moves out of USD and into more risk-sensitive currencies like AUD, NZD and CAD. Bloomberg headlines state that President Donald Trump is set to meet Chinese trade Chief Liu He today as the last conversation of a round of talks that took place between both parties this week in Washington D.C..
WTI prices stabilised yesterday after the massive 3% soar on Wednesday, which kept the loonie pinned in the middle of the G10 currency board as a positive beat on Wholesale Sales wasn’t enough to make CAD push higher. Neither was Bank of Canada’s Governor Stephen Poloz speech at the end of the afternoon, in which he edged towards dovishness as he characterized the upwards path for rate hikes as “uncertain”. Still, some hawkish nuggets were there to be found as Poloz assessed the economy continues to build momentum after the surprisingly soft patch for oil prices in Q4 last year. On the sixth of March the BoC meets again and will most likely hold the rates unchanged, though a rate hike in the back half of the year still appears to be a real possibility. Retail Sales today have the potential to make for an interesting end to the week for the loonie at 13:30 GMT.