Sterling was the only G10 currency, apart from JPY, to post losses against a broadly weakening dollar yesterday. After the leading party failed to publish the full legal advice, Labour, the Democratic Unionist Party, and four other parties laid down a motion of contempt. This will postpone today’s debate in Parliament and shows the complexity of the final draft deal. The price of protecting against sterling downside continues to tick up as the process approaches crunch time. Sterling will unlikely make a sustained break from current levels until a definitive stance from Parliament is aired, which will likely be after the deal is voted upon. For now, sterling remains stalled at current levels due to investors remaining averse to the risk soon approaching. Bank of England Governor Mark Carney will testify before the Treasury Select Committee today at 9:15 GMT sharing the bank’s view on the economic impacts of the current Brexit Withdrawal Agreement.
The euro joined most of the G10 currencies in making gains against the dollar on the back of a positive sentiment towards a truce in global trade tensions. November´s Final German and Eurozone Manufacturing PMIs released yesterday came slightly above October´s reading and expectations, though added little of a boost to the currency. Positive news from Italy, on the other hand, supported the euro rally by the end of the day, with finance minister Giovanni Tria committing to finding a solution to the budget dispute with the EU. With Italian media reporting the government may be willing to agree on a 2% deficit target rather than the 2.4% initially proposed, the yield on Italian 10-year bonds has dipped to its lowest level since September. The spread with the German bond yields, usually regarded as a measure of the perceived sovereign risk, narrowed by more than 300 bps, adding further strength to the currency.
The risk on sentiment that oozed through markets yesterday after China and the US got closer on trade over the weekend was beneficial for many asset classes, yet USD, unfortunately, didn’t find itself among the beneficiaries of the changing winds. Fears have risen lately about the Federal Reserve pausing their rate hikes as they might be approaching an interest level that is above the neutral level, which means it would slow down the economy. However, yesterday’s ISM Manufacturing Purchasing Manager Index shows that either this isn’t the case, or that the US economy may actually be able to bear higher rates as the print came out above expectations at a very firm score of 59.3. Export orders remained near October lows, indicating exporters are already experiencing the bite of the trade spat with China, but domestic factors remained strong, showing that the number of Fed rate hikes may indeed be under-priced currently by markets.
The loonie faces the second session in a row with gains against the dollar, likely helped by crude oil prices marking their biggest two-day gain since June. Oil prices recovering after Saudi Arabia and Russia agreed on production cuts ahead of an OPEC meeting this week, is likely “the little help from a friend” CAD needed to start an upward path. Further, Alberta’s commitment to reduce production by 350,000 barrels per day also added to oils rally. The Financial Post came with an alarming article today, showing that the report of Statistics Canada released on Friday showed that the savings rate in Canada has dipped to the lowest point in a decade. This can be seen as a sign that the consumption-driven growth in Canada in this business cycle may be coming to an end, as there is little extra room for consumers to spend more. On the contrary, with the high household income to debt ratios in the country, this implies consumers may be forced to deleverage in the near future, which forms a potential time bomb for the economy. Despite BoC´s policy rate announcement coming tomorrow with no surprises expected, further guidance should set the pace for the tone of monetary policy stance next year ahead of a strong economic outlook.