Morning Report: 19 October 2018

19th October 2018

GBP. Sterling has traded largely in line with the euro over the last 24 hours, falling back against the US dollar yesterday afternoon, and trading flat overnight. Theresa May’s latest strategy to keep Brexit negotiations progressing became clear yesterday, as British and European officials acknowledged that one option was extending the transition period. The backlash from within the Conservative party was immediate and intense – although hardly unsurprising given how divided the party remains over Brexit. May will send Jeremy Hunt to give a radio interview at 08:10 BST to calm the Tory masses. Yesterday’s main event on the data calendar was Retail Sales, which contracted 0.8% in September, as food sales saw their sharpest drop in three years after a summer of barbecues and flip-flops.

EUR. Issues over Brexit began to take a backseat in yesterday’s EU Council meeting as EU leaders turned their focus to the Italian budget. Yesterday evening the EC said Italy’s spending plans were excessive even for a country looking to boost growth to be in line with the EU average. With cracks now forming in the tentative Italian coalition, Italian yields shot back up as investors liquidated positions due to concerns over Italian government risk. The measure of risk in Italy, the spread between yields in German 10 year bonds and Italian 10 year bonds, rose to the highest level since 2013. Markets remain spooked by developments in Italy with the 5-star/ League coalition set to respond to the EU’s concerns over their budget by Monday. With little data scheduled for the euro today, the single currency may continue to suffer the consequences of Italian officials’ comments.

USD. The dollar composite DXY index popped back above its recent trading range yesterday as short-term US yields began to rise. This was expected following relatively hawkish Federal Reserve meeting minutes released on Wednesday eve. The dollar outperformed most of the G10 currency board in yesterday’s session, with the exception of JPY, as global risk began to show signs of returning. The US Treasury report, which didn’t explicitly label China a currency manipulator, did, however, contain a 2-page condemnation of the Chinese Central Bank’s opaque activities. The treasury report added an additional layer to already tense US-China relations due to the imposition of tariffs.

CAD. The loonie was once again on the back foot yesterday, as the US dollar was well bid in general and oil prices fell and fixed income yields rose after Wednesday’s FOMC minutes. Today’s Canadian data offers the loonie a chance at a rally, however, with both Retail Sales and the Consumer Price Index out at 13:30 BST. The two releases together are the last significant data before next week’s Bank of Canada meeting, which is overwhelmingly expected to result in a rate hike.