Morning Report: 22 August 2018

22nd August 2018

GBP. Sterling topped the G10 currency board yesterday despite little positive news. Brexit Secretary Dominic Raab met his EU counterpart Michel Barnier in Brussels, but little developments have been made. Despite this, statements about going forward sounded progressive as they referenced increasing the number of future talks. This gave sterling a second wave of strength and the 4-day GBPUSD rally may be compounded today by another possible dollar sell-off.

EUR. The euro crept up for the fifth day in a row against the dollar yesterday and only saw GBP strengthening marginally more out of the entire G10 currency family. Yields on 10-year Italian government bonds dipped below the 3% again after reaching their highest level since the election outcome in May this year. The driver of the recent surge in Italian yields, which means the prices on Italian debt are heading down as the two are inversely related, comes from the new government budget plans. These include planned expenditures that will likely have the current government debt of 132% of Gross Domestic Product skyrocket even further. The government will have to finance this debt by issuing bonds, therefore pushing the price down and yields up as the supply of bonds increases. Yields retraced slightly as credit rater Moody’s decided to postpone its review of the country’s sovereign rating to the end of October after the new budget is released. As the expenditures may be spread out over multiple years, the yearly budget might stay within European Union limits, avoiding a diplomatic confrontation with the institution.

USD. Special Counsel and former Director of the FBI, Robert Mueller, trumped Trump yesterday as both the President’s campaign manager and former personal lawyer were found guilty. Michael Cohen, Trump’s previous personal lawyer, pleaded guilty to breaking campaign finance laws after paying Stormy Daniels, a playboy model that sold her story to the National Enquirer. The guilty confession by Cohen is the first time a member of the Trump administration’s inner circle has pointed the finger at any misdoing by the President. Manafort, Trump’s old campaign manager, was found guilty of tax evasion and bank fraud in a close time proximity to the guilty plea by Cohen. Political risk, as well as the threat of impeachment for the “Make America Great Again” leader, is mounting, and this doesn’t bode well for a dollar that has been broadly depreciating the last 4 days. With only the Federal Reserve’s meeting minutes released today, which are unlikely to signal any further developments by the hawkish central bank, all eyes will be on the President and his inability to not comment on Twitter about ongoing investigations.

CAD. Headwinds fiercely blew in the face of the loonie yesterday as lost ground against most other G10 currencies for no clear reason. Admittedly, June’s Wholesale Sales were in for a shocking miss at -0.8%, where a plus of 0.7% was expected and the May reading was revised downwards as well. This, however, is not a first tier data release usually, which makes CAD move slightly obscurely, especially since oil prices actually did rally during the day. Today at 13:30 BST Retail sales are on the agenda.