News & analysis


Sterling continued to fall against the US dollar yesterday despite the greenback broadly weakening against the G10 basket. The main highlight of the day came in the form of another governmental loss in Parliament. Theresa May laid down a neutral motion, which would allow a few amendments to take place, but mainly to reinforce her mandate that Parliament endorses a change in the Irish backstop mechanism and no-deal being taken off the negotiating table. The latter was the main sticking point for the ERG, who ultimately abstained from voting and other Brexiteers within the Tory party. This meant that May lost the vote, and face, by 303 votes to 258. With no legal ramifications, the backlash of last night’s vote comes in the form of even less credibility in May’s bargaining position with the EU, which remained fragile to begin with. Going forward, the main Brexit deadline now is the 27th where Labour’s Yvette Cooper and the Conservatives’ Oliver Letwin will table an amendment to block a no-deal Brexit in mid-March should a deal not be ratified by then. The last effort by Cooper and Boles saw a marginal defeat, but this time round rumours suggest there will be further ministerial resignations if May whips against Parliament’s attempt to legally block a no-deal scenario.


Yesterday, the euro dipped to its 3-months low against the dollar momentarily, after GDP data in Q4 2018 was released. Despite the headline showing stagnation in the German economy, the figure dissipated fears of a possible technical recession in the biggest Eurozone economy, bringing some relief to the single currency afterwards. As a whole, the Eurozone held to its previous pace in Q3, balancing out the poor German and Italian performance, with a better one in Spain, France and other smaller European economies. The euro strengthened later in the day on the back of weak US data and a positive atmosphere surrounding US-China trade negotiations. Early this morning, however, the currency started on the back foot after a 4.6% contraction in Eurozone new car registrations. A further negative reaction may come when Spanish Prime Minister Pedro Sanchez announces snap elections in a press conference at 09:00 GMT.


Yesterday, the broad dollar index suffered minor blows despite cracking fresh 2019 highs throughout the day. A string of unexpected negative data weighed on the dollar in the afternoon, with the biggest surprise coming from December’s Retail Sales. The headline reading fell by 1.2% on a monthly basis while a 1.8% contraction excluding auto sales was also registered. However, there are a few transitory reasons to explain this particular data release such as advanced Black Friday sales and a negative shock to consumer demand caused by the government shutdown. Despite this, the market reacted as if the data reflected a deeper sign of economic weakness. Negativity was compounded by the Fed’s Brainard, who stated that the balance sheet reduction should end by late 2019 instead of early 2020. This evidenced a new wave of dovishness from Fed officials. There was little news on the US-China front, however, but Donald Trump made sure it was not a dull day at all. A White House spokesperson announced that the US President will be signing the bipartisan agreement on immigration and border policies to avoid a second government shutdown on Friday, while also declaring a state of national emergency on the humanitarian crisis at the border. Such a move will allow Donald Trump to bypass Congress and secure more funds for the border wall than was previously allocated by the budget bill, setting the tones for further tensions in US politics.


The loonie continued to soften against the US dollar yesterday, despite crude prices continuing to firm, as another contraction in Manufacturing Sales was evidenced in December’s data. The move caused the Canadian GDP nowcast, a sensitive GDP forecast to new data, to fall to 0.9% for Q4’s GDP – half a percentage point lower than the Bank of Canada anticipated in January.

FX Elsewhere

The Chinese yuan has depreciated for 3 straight days now as economic data continues to highlight risks to growth and inflation, despite export growth continuing at a rapid pace. This morning saw negative surprises in both Producer and Consumer Price Indices, with the former rattling market nerves. The Peoples Bank of China have already taken initial steps such as increasing liquidity in the financial sector and increasing M2 money supply to stimulate growth and inflation, but a more dramatic move may be needed such as a cut in the 4.35% deposit rate to a record low.