Third Time Lucky For May
March 15, 2019
Yesterday, sterling pared some of its gains made this week as May jostled to get an extension in Article 50. The result was a win for the government with a 212 majority in favour of an extension in the Brexit timeline. The question for May now is how long the extension will be. The answer rests firmly in the decision by the Democratic Unionist Party on whether they will now rally behind Mays withdrawal deal or not. Should the DUP finally roll over, many of the eurosceptic MP’s may find rejecting the deal a hard sell to their constituencies. For this reason, the DUP’s decision carries substantially more votes than the 10 MPs within their party. If a deal is pushed through next week in a third meaningful vote, May will request a short extension to A50 such that the legal framework of her deal can be finalised. This would undoubtedly be the best case for sterling now as it awaits the signal to push back towards fair value. However, if the third meaningful vote fails to obtain a majority in Parliament, the length of any extension remains ambiguous and the uncertainty could cause sterling to soften in the short-term.
After four days of advances against USD, the euro took its foot from the gas and retraced somewhat, on a day that brought few shockers. Germany’s Final Consumer Price Index Reading for February stomached the tiniest of misses as it fell to 0.4%, while the French edition met expectations with a flat price change for the month. Setting a somber mood, the leading German Ifo economic research institute published a very downbeat forecast for 2019, with total growth expected to sink to 0.6%. Looking at the bright side, they do consider this is temporary and foresee growth to pick up to 1.8% in 2020. Additionally, they note that life is as good as it gets for German consumers, due to strong wage gains, low inflation and a tax relief scheme. Today sees the Eurozone-wide final CPI reading at 10:00 GMT as the most important data release.
The greenback made a comeback with its first day of gains in five trading sessions, after a day that saw import prices unexpectedly rise. The February Import Price Index strengthened by 0.6%, despite broad dollar strength in recent months. This can be the first telltale of import tariffs having inflationary effects, as purchasers shift towards suppliers that do not fall under Trump’s recently installed tariffs, but who do require a higher base price for their products. Still, the year-on-year import prices shrank by 1.3%, but as this occurred in an environment of declining oil prices and broad dollar strength, import price inflation may be back with a vengeance in 2019. The Capacity Utilisation Rate and Industrial Production are due at 13:15 GMT, followed by the Preliminary University of Michigan Consumer Sentiment at 14:00.
The loonie remained close to the opening price against most other G10 currencies on a day on which little FX relevant occurred in the polar-boarding country. Bank of Canada Deputy Governor Carolyn Wilkins wasn’t able to get things moving yesterday either, despite the fact she warned that lower economic growth is set to stay, even if trade tensions get resolved. Today’s Manufacturing Sales may bring a thaw in the glacial state of the Canadian dollar this week at 13:30 GMT. If not, we are likely bound to wait for the CPI and Retail Sales double whammy coming out Friday next week to warm us up a little.