The dollar burst into sensational volatility yesterday afternoon, weakening broadly as the widely followed ISM Manufacturing Purchasing Managers Index fell into contractionary territory for the first time in three years. The notes from survey respondents reported in the release were universally negative, citing falling new orders and a worsening general outlook. The dollar sold off heavily, while the yield on the US 10 year treasury fell to its lowest level since 2016 as markets priced in lower growth and lower rates from the Federal Reserve.
Last night’s momentous events in Westminster proved indecisive for sterling, which has rallied from yesterday’s two-year lows against the US dollar, although this is largely due to dismal ISM manufacturing survey data. With the House of Commons in control of its own order paper and Boris Johnson’s Government lacking a working majority, the passage of no-deal blocking legislation through the Commons today seems likely. Sterling’s enthusiasm on the news is likely to be limited, as the Government and allies in the House of Lords have a range of options to frustrate the passage of the legislation into law. Boris Johnson will similarly call for a General Election today but is unlikely to be assisted by the Opposition, with Jeremy Corbyn last night saying they would not vote for a General Election until blocking legislation had passed into law. The outlook for sterling remains tied to the binary likelihood of no deal. Events that increase the likelihood of no deal, such as Johnson successfully resisting the passage of blocking legislation, or taking the lead in a hypothetical general election race, will continue to hammer sterling. Today at 09:30 BST, Markit’s Manufacturing Purchasing Managers Index will be released.
Yesterday Premier-designate Giuseppe Conte passed the final stage to create a new government as the Five Star party supported his efforts in an online vote with an approval rating of 79.3%. Conte is expected to meet President Mattarella today to ask to form a new government consisting of the Five Star and Democratic party. This would prevent far-right Ligue leader Matteo Salvini’s attempts to win power through snap elections. Conte, a political independent who was brought in last year to run the coalition government, may look to form a new cabinet today. Easing political tensions in the Mediterranean bodes well for the single currency, which clawed back losses along with G10 compatriots against the dollar yesterday. On the data calendar, a plethora of ECB speakers are pencilled in, while Retail Sales and Service sector PMIs are released this morning.
The loonie clawed back some of yesterday’s losses as the US ISM index prompted a soft US dollar across the board. However, weakening construction and manufacturing indices globally put oil on the back foot and WTI crude eventually closed 1.93% lower on the day. That being said, today there is a glimmer of optimism for the loonie as it sits below yesterday’s open prior to a key Bank of Canada meeting today at 15:00 BST. Although Governor Poloz isn’t expected to cut rates at today’s policy meeting, markets are expecting the central bank chief to stress the deteriorating external climate since the last meeting in June. With the Federal Reserve expected to cut extensively for the remainder of the year, market participants are expecting a similar insurance cut in October from the BoC – this may be heavily signalled at today’s meeting.