Morning Report: 3 July 2018

3rd July 2018

GBP.  Despite above expectation UK manufacturing figures for June being released yesterday, sterling still lost ground against both the euro and dollar, as political uncertainty continues to weigh on the currency. In particular, details still remain extremely vague as to the “third way” customs union model with the European Union that has been mooted by Prime Minister Theresa May’s office ahead of a crucial cabinet summit on Friday. The uncertainty has caused members of her own Conservative party to threaten revolt, should they perceive the final Brexit plans to not be in keeping with her ‘no deal is better than a bad deal’ mantra. Today, Construction PMI is released with an increase in growth level from May’s 52.5 being expected. The appearing slowdown in the construction sector was one of the reasons why Q1 Gross Domestic Product was only 0.1% in the first readings, only to be revised upwards last Friday as it emerged this slowdown was overestimated.

 

EUR. The European session brought broad weakness to the single currency yesterday and, although the momentum reversed when the US session commenced, the euro did not manage to pare all losses. Cats, having nine lives, were looking enviously at Angela Merkel yesterday, with her thirteen year political career surviving yet another crisis as she managed to compromise with her defiant Interior Minister Horst Seehofer on a contentious immigration issue. Seehofer eventually agreed to stay in function and commented he was “very satisfied” with the eventual solution. The news that political risk has minimised sees the euro start on the front foot against the dollar this morning.  Meanwhile Eurozone Unemployment remains on track for reaching 8% at the end of the year, as the print performed slightly better than expected, coming in at 8.4% in May. Today sees both the Producer Price Index and Retail Sales for May being published at 10:00 BST.

 

USD. The greenback once again benefitted as uncertainty reigned in the markets, being the strongest performer on the G10 currency board. Trade tensions continue to worsen, with Canada imposing tariffs on US exports to the amount of $12.5bn on Sunday, which sent demand for US treasuries and the US dollar up as investors sought safer assets. The European Union also threatened to retaliate in kind against the tariffs Trump plans to levy on cars coming from the EU. Also triggered by a more hostile global trade environment, 16 ministers of Asian countries, among which are China, India and Japan, reaffirmed their ambition to start the Regional Comprehensive Economic Partnership. This would be the biggest trade bloc in the world and could be a huge spanner in the wheels for Trump’s “divide and conquer” trade strategy, in which he aims to levy on the US negotiation position by only striking bilateral trade deals. As other countries respond by getting more united instead of being divided Trump’s strategy may backfire, limiting the US access to global markets, while other countries take advantage of the gap left by the US in global markets. Despite this, manufacturing data from the US yesterday shows a 1.5% rise month-on-month, showing that for now the sector continues to expand in spite of the increasingly prickly international trade environment.

 

CAD. Despite no economic data released yesterday, the loonie posted losses due to the declining oil prices as commodities as a whole took a hit yesterday whilst risk across markets rose, whilst the dollar outperformed the whole G10 currency board. This move came after Canada imposed USD$12.5bn worth of tariffs on US imports ranging from whiskey to pizza in retaliation to the United States’ Steel and Aluminium tariff of 25%. This morning, the loonie has started on the front foot as oil price begin to rally as news breaks that the future supply of oil produced from Libya looks questionable. Libya’s National Oil Corporation, who control the infrastructure used in Libya’s oil production, declared unforeseeable circumstances when trying to export 850,000 bpd from certain ports on Monday – with the move wiping out OPEC’s planned production increases. Further uncertainty over the future of global oil supplies has caused WTI to rally over a percentage point at time of writing, with the loonie retracing some losses made yesterday. At 14:30 BST Manufacturing Purchasing Managers Index is released.