Morning Report: 13 July 2016

13th July 2016 By: Ranko Berich

GBP Sterling continued to outperform yesterday, rising to new monthly highs versus the euro and new weekly highs against the dollar. Sterling has rallied strongly this week after Theresa May was unofficially confirmed to be the next British Prime Minister. The sterling strength comes despite tomorrow’s Bank of England’s interest rate decision, where markets are widely anticipating an interest rate cut. However, the Bank of England could signal that a first rate cut is a precautionary measure after the Brexit referendum, while another cut could be announced as soon as next month if the UK’s data proves to be worrisome. No data is expected today.

EUR The euro strengthened against the US dollar yesterday, but has given away most of its gains this morning. Conversely, the euro fell against sterling yesterday, but is clawing back most of overnight’s losses. The scope of the Eurozone’s banking system weakness remains to be seen, but question marks are being raised with regard to who should be assuming the possible costs. Since the implementation of the BRRD (Bank Recovery and Resolution Directive), the use of public money to rescue banks is secondary, once shareholders and bondholders are enforced to realize losses. The problem is though that many of the Italian bank’s bondholders are retail investors, who bought the banks’ bonds on the basis that they were higher yielding deposits. Therefore, “bailing them in” may trigger the social disruption and economic hardship the BRRD was supposed to avoid. Eurozone’s industrial production data will be released at 10.00 BST.

USD The US dollar is strengthening this morning, reverting a round of short-covering in sterling and Japanese yen crosses, which left the greenback lower against most of the G10 currencies earlier this week. Yesterday’s Job Openings and Labour Turnover Summary (JOLTS) data showed an upwards revision in June to a new all-time high number of open vacancies. This is another strong signal that the US labour market keeps up the momentum, and the Federal Reserve will probably look at these figures in coming meetings. Imports price data is released today at 13.30 BST, followed by US crude oil inventories at 15.30.

CAD The loonie has weakened this morning after crude oil prices resumed the downward trend that was observed this month. The Bank of Canada releases today its last interest rate decision, but no changes are expected. However, a weaker growth outlook and a contraction in non-resource sectors exports could prove enough reason to see a dovish message from the central bank. The interest rate decision and the statement will be released at 15.00 BST, followed by a press conference at 16.15.

UK News

  • FT. Brexit barometer: retail shows signs of recovery. Day-to-day spending in economy appears to have improved. Britain’s economy was hit by the country’s historic vote to leave the EU last month but real-time data suggest a recovery in retail despite a sharp drop in consumer confidence, the second FT Brexit Barometer shows.
  • FT. Brexit uncertainty starts to affect small British businesses. Companies have reported laying off staff, raising prices, or scaling back on investment plans
  • Reuters. Bank of England’s Carney hints again at more stimulus after Brexit. Bank of England Governor Mark Carney said on Tuesday that a hit to Britain’s economy from last month’s decision by voters to leave the European Union could prompt the Bank to act, hinting again that more stimulus is on the way.