Morning Report: 18 November 2016

18th November 2016 By: Ranko Berich

GBP Sterling has reached new 2-month highs against the euro and is clawing back last night’s losses versus the dollar. Germany’s Finance Minister, Wolfang Schauble, has reinforced the EU’s tough position towards Brexit and the UK saying that there would be no “à la carte” menu when leaving the European Union. Schauble’s tough position on Brexit clashes with the UK’s expectations of a softer stance from Germany, a net exporter to the UK, indicating that euro clearing must be done within the Eurozone because the single currency is the EU’s common currency. No data will be released today in the UK, but the MPC’s Broadbent will speak at 9:10 GMT.

EUR The euro is the second weakest currency this month among the G10 currencies (behind the Japanese yen). This month’s rally in the pound and the dollar have been sanguine to the single currency which recently hit new fresh lows for 2016 against USD and 2-month lows versus GBP. Mario Draghi spoke earlier today highlighting persistently weak levels of inflation in the Eurozone. Consumer inflation reached a 2-year high in October data showed this week, but remains distant from the ECB’s target of 2%. However, Draghi’s comments appear to have been ignored by the markets after saying: “…inflation convergence towards 2% is durable, even with a reduction in monetary accommodation”. Draghi’s comments point towards a reduction of the eurozone’s current monetary policy program. The ECB’s next meeting takes place on December 8th.

USD The Fed’s President Janet Yellen gave more momentum to the US dollar yesterday during her first speech after the US elections. Yellen, addressing the US Congress yesterday, said that a rate hike could be appropriate soon and that the Federal Reserve is reluctant to delay an interest rate hike for too long. The news sent the Fed Funds implied probabilities of a rate hike to the highest level this year so far. After almost a year since the last interest rate hike, the Federal Reserve is ongoing an exceptionally slow process of normalizing interest rates, facing the risk of having to shift its prudent stance towards more aggressive rounds of tightening in the case inflation actually does surge. Markets do not look prepared for a faster and more aggressive tightening process and that could lead to sharp drops in the US equity and fixed income benchmarks. Also, markets seem to have priced-in the effects of Trump’s anticipated fiscal stimulus too fast too soon, leaving room for sharp retracements in case some of these expectations begin to cool down. There will be no data releases from the US today, but the FOMC’s James Bullard is expected to speak at 10.30 GMT in Frankfurt in a rather interesting topic: “Monetary Policy: Which Road Ahead?”. With Bullard’s strong dovish position in the FOMC it would be interesting, and impactful for the USD, to see a shift in his stance.

CAD The loonie is on the back foot today after Yellen’s comments yesterday pushed the dollar higher against all G10 FX. Crude oil prices also fell yesterday despite of new headlines indicating that optimism is rising regarding an agreement by the OPEC countries to reach a production cut. The likelihood of a real agreement is looked at by the markets with strong scepticism after several failed attempts this year. The Canadian economic calendar today includes the release of the consumer price index at 13.30 GMT.

UK News

  • FT. Draghi hints ECB easing set to last as inflation undershoots. Policymakers at the European Central Bank are yet to see evidence of a sustained rise in inflation, suggesting they will continue with their easing policies some time into the future, president Mario Draghi has said. “We cannot be sanguine over the economic outlook”, said Mr Draghi, adding: Going forward, our assessment will depend on whether we see a sustained adjustment in the path of inflation towards that objective. And that means that inflation convergence towards 2% is durable, even with a reduction in monetary accommodation. Inflation dynamics, in other words, need to be self-sustained.
  • Reuters. May’s changing vocabulary signals shift from ‘hard Brexit’. There is a recognisable repetition in Theresa May’s speeches about Britain’s decision to leave the European Union: “Brexit means Brexit”, making “a success of it” and getting “the best deal” for Britain are some of her stump phrases. But a closer look at her speeches suggests her position on key aspects of Brexit has evolved since she took office in the aftermath of the June 23 vote to leave.