Morning Report: 18 September 2018

18th September 2018

GBP. Sterling rallied 0.68% when measured against the dollar yesterday, but has started on the back foot this morning. Broad dollar weakness is attributable to yesterday’s cable move ahead of a busy calendar week that kicks off tomorrow. Today, a poll of academics by the U.K. in a Changing Europe found that 88% of respondents believed Theresa May would remain in power until the Brexit deadline on March 29th, in spite of increasing momentum of the Eurosceptic faction within her own party. On a bleaker note, the survey also found that the academics believed the chances of a no-deal Brexit lie at around 50% – a figure often quoted by officials involved with the matter. Today, Donald Tusk, the President of the EU Council, reiterated that a deal which limits damage from Brexit is in the interest of both parties. This runs in line with our base case that EU officials will increasingly voice their support of a Brexit deal around the Salzburg Summit that starts tomorrow in an attempt to sway public opinion.

EUR. The euro’s trading action fitted well with the Eurozone economic data, as the Eurozone’s main data released yesterday, August’s Final Consumer Price Index, came in at 2% as expected and the single currency ended up in the middle of the G10 currency board. Today, the European Central Bank President Mario Draghi speaks at 8:15 BST.

USD. The dollar posted broad losses yesterday despite yields on 10-year treasuries rising above the 3% mark. This normally benefits the dollar as it increases the return on investment in a relatively safe asset, US government debt, but investors awaited news on trade tariffs when trading the dollar yesterday. The White House has released plans to levy a 10% tariff on  $200 billion worth of Chinese goods as of September 24th, which adds to the previous $50bn imposed mainly on Steel and Aluminium at the beginning of summer. The Trump administration has threatened an increase to 25% on the same headline amount in 2019,  with the delay allowing US businesses time to adjust to the changing trade climate. Both the dollar and JPY, two currencies that have previously benefited from the Trade War, have both posted broad losses this morning. All eyes will be on China’s retaliation today, with some signs that China will attempt not to overdo its response in order not to provoke further US measures, while others report that these new tariffs will be enough for China to retreat from the fresh round of trade talks.

CAD. The loonie dangled at the lowest rung of the G10 currency ladder yesterday as it became clear President Trump indeed follows up on his plans to install a 10% tariff on $200 billion worth of Chinese goods, while a new NAFTA agreement is still far from a done deal. To that cause, Canada’s Minister of Foreign Affairs Chrystia Freeland will return to Washington this week to meet with Robert Lighthizer, the main NAFTA negotiator on behalf of the US. Foreign Security Purchases of Canadian Assets meanwhile weren’t able to bring any solace to CAD, as the currency lost ground while the FSPs beat their target by a wide margin and came in at 12.65 billion in July. Today at 13:30 monthly Manufacturing Sales will be the main event.