Morning Report: 16 February 2017

16th February 2017 By: Ranko Berich

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GBP  Sterling regained some ground yesterday afternoon against the dollar, after having initially fallen sharply following data showing dismal wage growth data in the UK. Wages slowing down and increasing inflation threaten UK consumers spending power, the main factor driving economic growth in the UK after the referendum. No data is released today in the UK, but investors will focus the attention in tomorrow’s critical retail sales data. A miss in tomorrow’s retail sales index could revive growth fears which could well send sterling to new lows.

EUR The euro also posted a remarkable recovery against the USD yesterday, despite strong inflation figures in the US. Euro data was positive yesterday, with a Trade Balance surplus widening to €24.5 billion. The data is scarce today and tomorrow, with political developments remaining the focus of attention.

USD  Something particularly intriguing happened to the USD this week. The USD retraced sharply yesterday, despite extremely positive inflation and retail sales data. Moreover, Janet Yellen, the Chair of the Federal Reserve, had given unexpectedly hawkish testimony on the economy to the Senate Banking Committee earlier this week. Normally, this would be a cocktail for a stronger US dollar. However, a key pillar of the argument in favour of USD strength over the past year has been the higher rate of interest on offer from the greenback. Yet with yesterday’s data showing that yields on US Treasury instruments are now failing to keep pace with rising inflation expectations, with ten year yields seeing strong resistance at 2.5%, market participants took the opportunity to cut long USD positions, triggering the retracement. This afternoon, we see manufacturing, employment and construction data from the US.

CAD  The loonie has also begun this morning on the front foot against the dollar, inching towards the lows on USDCAD that were posted at the beginning of this month. The best performing currencies in 2017 so far have included fellow petrocurrencies such as the Russian ruble and the South African rand, which provides a clear perspective of why the CAD performance is also very positive. Crude oil continues to perform robustly, despite increasing crude oil inventories, which jumped another 9.5M last week completing nearly +30M new stocks only in February. Despite the performance of crude oil related currencies, longer term, the increasing number of stocks, and the speed of inventory increases, points towards a worrisome outlook.

UK News

Number of EU nationals working in the UK starts to fall – FT. Figures for the end of 2016 reinforce anecdotal evidence on the impact of Brexit. The number of EU nationals working in the UK fell in the last quarter of 2016, adding to anecdotal evidence that employers are finding it harder to attract and retain staff from Europe since the Brexit vote. Figures from the Office for National Statistics on Wednesday showed there were 2.2m people working in the UK at the end of last year who were nationals of another EU country, nearly 19,000 fewer than in the third quarter.