Morning Report: 06 August 2018

6th August 2018

 

GBP. It took Bank of England Governor Mark Carney to discuss Brexit possibilities on Radio 4 last Friday for sterling to reach a fresh 7-week low following a dovish hike on Thursday. Carney stated that the possibility of a no-deal Brexit is uncomfortably high, and developments over the weekend have done little to shake this sentiment. This is evidenced by the UK’s International Trade Secretary, Liam Fox, reported in the Sunday Times saying that the odds of crashing out of the single market with no deal are around 60%. In a week which saw interest rates bumped up to 0.75%, sterling depreciated near a percentage point against the dollar as the BoE’s decision wasn’t portrayed as the beginning of a hiking cycle. Positive surprises in this week’s data may cause sterling to bounce from recent lows, however, investors will have to wait until Friday when Gross Domestic Product is released for June and Q2. Second quarter growth is expected to rebound from Q1’s 0.2% upwardly revised figure to 0.4%, while June’s reading is expected to show such a trend and come in at 0.4% too. Further, the UK’s trade balance deficit is expected to moderate while industrial based indices are forecast to show a slump in growth.

 

EUR. Euro closed off a rough week on Friday with minor losses against USD and is trading down this morning as well after a dreadful print in German Factory Orders. These declined by 4.0% in June, far below the expected rate of -0.3%. Especially orders from outside the European Union saw a stark decline at -5.9%, which can potentially be caused by supply chains around the world starting to source locally more often, in order to be robust against possible negative impacts of the global rise of trade tariffs.

 

USD. The bubbling trade war creeps back into the market’s scope, and US President Donald Trump’s weekend tweets have shown no calming of tensions. In a string of self-confirmation, the tweets set out the reasoning for tariffs by the US and suggested the US had “won” the current trade war against China. The tweets came after threats from Beijing that a further $60bn worth of US imports will receive tariffs in retaliation from the US drawing up its own plans for increased protectionist measures. Trade Wars aside, last week saw the dollar broadly rally, with only the Canadian dollar posting significant gains against the greenback. Last week’s heavy US data calendar proved mixed, however, with the Federal Reserve’s announcement proving a non-event, inflation measures slightly undershooting, and employment growth falling short of expectations – but the unemployment rate fell from 4.0% to 3.9%. This week’s data looks less eventful for the greenback, with the Producer Price Index measure of inflation released on Thursday and the consumer counterpart released on the Friday.

 

CAD. The loonie flexed its muscles on Friday and achieved its strongest level against the greenback in seven weeks. Canada’s Trade Balance came in better than expected, with a deficit that shrank to a mere 0.6 billion in June, far below the -2.3 billion expected and closing in on a balanced trade account. Canada suddenly found itself in a diplomatic spat this weekend after Saudi Arabia recalled its ambassador to Ottowa, while it also urged Canada’s diplomatic envoy to leave its capital Riyadh after Minister of Foreign Affairs Chrystia Freeland called for the release of women’s right activists. For Canada’s biggest data release this week we must practice patience, as the labour market data is set for release at the end of the week on Friday.

FX Elsewhere. On Friday, the Peoples Bank of China stepped in to currency markets an implemented a 20% reserve requirement on banks that sell dollars to clients using forward contracts, in an attempt to stem the recent currency depreciation. Over the weekend, sources have leaked that the PBOC will not allow the yuan to break the 7.00 level against the dollar, reinforcing the central bank’s appetite to intervene in order to stem capital outflows. With Trump threatening further tariffs on Chinese imports, Chinese state media reports that Beijing are preparing for a long trade war – causing the yuan to pare some gains it made on Friday.