Morning Report: 22 October 2018

22nd October 2018

GBP. Sterling’s minor gains on Friday failed to reverse the losses it posted throughout the week. It proved a Brexit heavy week, with relatively positive data dispersed throughout the noisy UK-EU headlines. The data took a backseat in a week that initially proved so pivotal for Brexit discussions. The proposal of a Brexit deal has been moved back to November/ December time, with some Tory politicians suggesting David Davis, the former Brexit Secretary, may be lined up as interim PM should Theresa May lose the faith of her party. This week is light on the data front for sterling but as always, Brexit holds a wild card that could cause Brexit volatility. Theresa May is expected to give a statement to Parliament at 15:30 today regarding last week’s EU summit. She will face resistance from her own party regarding the proposed increase in the transition period as rumours spread that a vote of no confidence could be triggered any day.

EUR. Conciliatory remarks by European Commissioner Pierre Moscovici towards Italy on Friday helped the euro to end a choppy week against USD in the green, which limited the decline of EURUSD over the week. Moscovici said the EU won’t interfere in the new economic policies of the renegade Romans, which put a floor under Italian government bonds. Government bonds of other peripheral EU countries like Spain and Portugal experienced a brighter day as well, however, this can also be seen as a euro negative because it demonstrates that fear of contagion makes these countries suddenly look vulnerable as well. This week sees flash Purchasing Manager Indices on Wednesday which will give us some sign not only about the direction of the European economy but also about a possible divergence between Northern and Southern economies. The European Central Bank has a rate announcement and Press Conference on Thursday, which may remain in the shadow of new Italian innuendos.

USD. Friday’s quietness around the greenback did not serve the currency well and the DXY dollar index fell after being on an ascent in the days prior. This week sees a large collection of Federal Reserve speakers scattered over the week, with the Fed Beige Book on Wednesday, Core Durable Goods Orders on Thursday and potentially fireworks on Friday as the first reading of the third quarter US Gross Domestic Product is scheduled for release.

CAD. The Bank of Canada convenes on Wednesday for the first monetary policy announcement since the USMCA trade deal was negotiated. With less uncertainty looming now a trade deal has been struck, the BoC has relatively clear water to navigate. Friday’s negative surprises in inflation and Retail Sales data may leave the central bank with some wiggle room to avoid giving explicit forward guidance on their hiking cycle, but it will prove ineffective in denting the market’s expectations of a 25 basis point hike. Options markets currently price a 90% chance of a hike to 1.75%, and with little data scheduled for the week, Wednesday’s meeting may prove the sole source of strength for the loonie after it hit a 5-week low against the US dollar on Friday.