Morning Report: 26 October 2018

26th October 2018

GBP. Sterling had a quiet overnight session, after seeing another day of losses against the US dollar yesterday afternoon. UK media enjoyed a brief reprieve from hunting for scraps of Brexit news yesterday, as a dramatic turn of events in the House of Lords saw Sir Philip Green revealed as the beneficiary of a court injunction for secrecy over sexual harassment settlements. No headline data will be released today and no major Brexit meetings, speeches, or briefings are expected – although after the dramatic losses of the last two weeks a quiet day for sterling is far from assured.

EUR. The euro initially pared back some of Wednesday’s losses yesterday, enjoying a small rally in the morning and during the European Central Bank Press Conference. But a fresh wave of US dollar strength hit the single currency in the afternoon and saw it reach fresh two month lows against the greenback. For once, Mario Draghi was not the cause of yesterday’s Euro weakness, as the ECB president made it clear in the presser that the Bank’s Governing Council was not overly concerned by the recent slowdown in Eurozone growth and survey data, which Draghi characterised as a return to mean after a period of above capacity growth in 2017. Draghi was sanguine on Italian sovereign yields and their spread between Eurozone counterparts, saying that issuance was more important than the end of QE for bond spreads. He was willing to offer some indirect advice to Italy, which was to not question euro membership and make policy changes to reduce spreads between Italian and other EU sovereign yields. Similarly, the capital key that dictates how ECB asset repurchases will be divided between Eurozone sovereign bonds did not come up for discussion – meaning any market impact from recalculation will have to wait until December.

USD. The US dollar hit fresh highs for the third consecutive day yesterday as measured by a number of dollar indices. The move was most likely an extension of Wednesday and Tuesday’s themes, as investors once again traded on risk aversion and expectations of growth and policy divergence between the US dollar and its G10 counterparts.  US data was mixed yesterday, as Core Durable Goods fell well short of expectations but Pending Home Sales performed reasonably well. Given the dollar’s ascendency this week the fragile state of equity markets, the stakes are high for today’s release of Gross Domestic Product data for the third quarter at 13:30 BST. Growth is expected to cool slightly from the second quarter’s explosive 4.2% annualised expansion.

CAD. The loonie wasn’t able to hold on to the gains it made on Wednesday after the hawkish squawks made by the Bank of Canada after the rate statement and the currency fell victim to the ferocious USD march in the afternoon. The chance of another rate hike in January remains around 80%, however, showing the BoC is the only bank in the developed world that can keep up with the pace of rate hikes of the Federal Reserve. This should put a cap on how far USDCAD can rally further.

FX elsewhere. USDCNY was on the ascent again yesterday as the yuan slid to its nadir of almost a decade after having already shed 9% of its value over the last six months. Grumbling about China being a currency manipulator may arise from a certain oval shaped office on the back of this. The People’s Bank of China nevertheless continues to speak with a confucian confidence about their ability to keep the currency stable, at least verbally lending some support to their struggling currency. The fact that other major currencies like GBP, AUD and NZD lost similar amounts to the greenback over the last six months lends credibility to the PBOC’s claim it is not purposely weakening the yuan. However, one can also read into this the lower value of the yuan is driven by fundamental factors, for example about how the trade war damages the Chinese economy, which limits the chance of PBOC intervening to put a floor under its currency.