Morning Report: 28 April 2016

28th April 2016 By: Ranko Berich

GBP After sliding slightly yesterday in the wake of weak Q1 Gross Domestic Product Data, sterling is once again appreciating this morning. The UK’s economy grew 0.4% in Q1, compared to 0.6% previously. The services sector was the only area keeping the economy growing, as production, construction and agriculture all contracted. The data highlighted that the UK economic recovery remains inadequate, with growth still having failed to return to its pre-crisis trend on a sustained basis. Moreover, this morning the Confederation of British Industry released its Realized Sales index, which showed same store retain sales contracting on a year on year basis for the first time since 2013. However, with Chancellor George Osborne taking the opportunity to blame the recent slowdown in economic performance of Brexit anxiety, and polls continuing to show an increased likelihood of a ‘remain’ vote, traders seem happy to keep buying in to the pound, for now.

EUR The euro is benefitting from USD weakness this morning, but is beginning to give up some of yesterday’s gains versus sterling. Yesterday’s data releases were generally positive, with German Import Prices showing a month on month spike and lending to the private sector continued to increase 1.6% on a year on year basis. This morning has already seen the release of Spain’s Consumer Price Index, which showed year on year deflation of 1.1%. Although this was largely due to falling fuel prices, inflation elsewhere was insufficient to lift the overall index. German Consumer Price Index data will be released on a regional basis throughout the morning, culminating in Germany wide CPI at 13:00 BST.

USD USD is weaker across the board, after the Federal Reserve announced last night that it kept rates unchanged in its April meeting, and the Bank of Japan caught markets by surprise by declining to increase the pace of its monetary easing. The rate setting Federal Open Market Committee actually seemed marginally less cautious in its explanatory statement, expressing slightly less concern with global conditions. No judgement was made on how upside risks that may increase inflation could be balanced with downside ones, perhaps suggesting that there was a range of opinion among members. Esther George, Kansas City Fed chair, dissented from the vote to keep rates unchanged, instead voting to increase rates. This overall tone would usually have been fairly bullish for the US dollar, however the unexpected hawkishness from the BoJ has nonetheless caused traders to sell out of USD and in to JPY instead, with the pair having dropped off 3.5%. Today at 13:30 BST, US Gross Domestic Product figures for the first quarter of 2016 will be released.

CAD The loonie has surged to yet another fresh high against the US dollar this morning, after crude oil prices soared even further in the wake of the Fed and BoJ decisions of the last 24 hours. No Canadian data will be released, but rising oil prices may provide a reprieve for Canada’s battered oil industry, much of which was staring in the face of oblivion earlier this year when oil prices were below $30 a barrel for both major benchmarks.

JPY The yen is experiencing broad strength this morning, after the Bank of Japan declined to provide any fresh easing measures at this month’s meeting, despite the latest inflation data showing the country was once again experiencing deflation. Ending deflation has been a key plank of “Abenomics”, Prime Minister Shinzo Abe’s signature economic plan, and this morning’s lack of action may be an implicit admission of the fact that monetary policy is reaching its limits for stimulating inflation. Kuroda said that the BoJ believed risks to the economy were skewed to the downside, indicating that the Bank is fully aware of its predicament. The question now is how credible the BoJ’s assurances are that additional measures could be taken, and would be effective.

UK News

  • Spectator. Is Brexit to blame for the GDP slowdown? It’s difficult to argue with Osborne that the looming ‘threat’ of Brexit won’t be having some impact on these figures. But it’s unrealistic to argue that the EU referendum is wholly to blame. Take Ranko Berich, Head of market analysis at Monex Europe, who says: ‘Brexit anxiety could certainly be behind some of the slowdown in GDP growth but the truth is the recovery remains lacklustre’.
  • Reuters. UK house price growth cools after land tax changes. British annual house price growth cooled in April after the government introduced extra taxes on purchases of properties for rental and second homes, according to a survey from mortgage lender Nationwide on Thursday.
  • Reuters. Fed signals no rush to hike rates as economy hits soft patch. The Federal Reserve left interest rates unchanged on Wednesday, but kept the door open to a hike in June while showing little sign it was in a hurry to tighten monetary policy amid an apparent slowdown in the U.S. economy.