Morning Report: 25 October 2018

25th October 2018

GBP. Theresa May is looking as resilient as a rubber band as she bounces back from another bout of pressure from within her own party. Reports suggest that an emotive speech from May in front of the 1922 committee last night enabled the simmering pot that is the Tory party to cool down for now before it boiled over. May claimed that the Conservative Party must rally behind her for the good of the nation in order to avoid a no-deal Brexit as she continues to wrangle with the EU over the Irish backstop. Sterling didn’t look as resilient as May in the aftermath of the address, however, and continued to trade near lows of the day last night. With no press allowed into the commons for last night’s meeting, current reports are all hearsay from Conservative MP’s and may over exaggerate the impact May’s speech had on uniting her party. Regardless, the reports suggest light is at the end of the tunnel, causing the pound to start this morning on the front foot.

EUR. Yesterday the euro weakened in the run-up to the European Central Bank meeting later today on a day that had a strong scent of “eau de risk off” hanging around it. Eurozone Purchasing Manager Indices for October came out yesterday and their flash editions show the downward trend in their scores continues. Service PMI shed almost 5 points since its peak in January to a score of 53.3 while the Manufacturing leg of the print experienced an even harder landing, losing nine points since the December peak, now hitting the 52.1 level. As 50 indicates the neutral level this still points to an expansion of the Eurozone economy in Q4, but the slowdown in economic growth does not seem as transient as many have hoped. Today, it will be up to ECB President Mario Draghi and his monetary companions to grapple with this apparent growth slow down, the stubbornly low core inflation and those insubordinate Italians. The timing of these rising risks are Lady Fortune’s way of slapping the ECB in the face as the Frankfurt based technocrats were just about to exit their Asset Purchasing Program after December and start discussing the timing of their first rate hike in a decade.

USD. Tuesday’s equity market correction continued yesterday but failed to dampen the dollar’s rally against most G10 and Emerging Market currencies. The Bloomberg dollar index, which compares the dollar to 10 major peers, has broken out to its highest level since July 2017. There seems to be no definitive catalyst for yesterday’s rally which kicked off prior to the Wall Street open. However, a calming in US-Russian tensions following John Bolton’s meeting with President Putin, along with positive surprises in October’s Purchasing Managers Indices, likely spurred the dollar on. Only the loonie, following a hawkish Bank of Canada meeting, and JPY posted gains against the greenback. Today, the dollar data continues with Durable Goods Orders for September released at 13:30 BST.

CAD. Hawkish undertones from the Bank of Canada’s rate announcement yesterday kickstarted a slumbering loonie, which put the loonie at the top of the G10 currency board. As expected, the Bank of Canada has become the second major central bank to enter a truly post-crisis phase of monetary policy by signalling it is on a hiking path aimed at neutral interest rates. Previous BoC hikes and statements left a good deal of wiggle room for “wait and see” policymaking, but yesterday’s statement and monetary policy report are significantly more hawkish. It now looks like the BoC will be on a hiking path that broadly resembles that of the Federal Reserve. The removal of NAFTA risk was probably the single most important change from July’s Report. In fact, the July report had all the building blocks of today’s hawkish policy signal in terms of BoC optimism on wages and the economy, but the prospect of trade turmoil was weighing on domestic investment.