Morning Report: 11 October 2017

11th October 2017 By: Ranko Berich

GBP Sterling traded higher yesterday supported by positive data from the industrial, manufacturing and production sectors. However, the trade deficit expanded significantly beyond expectations to a new 10-year high, highlighting the difficulties the UK is facing after Brexit, despite the depreciation of sterling. A much weaker pound was expected to boost exports after Brexit but, so far, only the higher costs of imports are being reflected in the current account balance. Perhaps, the increase in the trade deficit will favour a softer stance towards Brexit from hard liner ‘Brexiteers’, as a bad deal with the EU would surely damage further the trade balance. Nonetheless, the improvement in manufacturing production (2.9% year-on-year), construction output (3.5% year-on-year) and industrial production (1.6% year-on-year) could further encourage the Bank of England to hike rates before year end.

EUR The euro shrugged off the potential for the political crisis in Spain to deepen yesterday as the world awaited a speech from Catalonia’s President Carles Puigdemont, and indeed continued to strengthen even after Puigdemont declared “independence”. Puigdemont’s play yesterday was to suspend the formal implementation of independence, as it aims to restart negotiations with Spanish President Mariano Rajoy’s government. The CUP, a pro-independence Catalan party, stated that Puigdemont’s move was a total betrayal to the region, and meant all sacrifice had been done for nothing. Other less radical parties declared that the Catalan president decision was reasonable. The decision appeared to be influenced by the last week events, where several companies based in Catalonia decided to transfer their HQ to other regions in Spain, including the two most important Catalan banks and other Ibex 35 blue chips. As a result, the state of independence will remain in limbo for the coming weeks, and possibly months.

USD The US dollar fell yesterday against all the G10 currencies in a confusing session for the greenback. No data, economic release nor political event triggered the drop in the US dollar. However, the euphoria that surrounded last Friday’s non-farm payrolls release, and the massive increase of wage growth, appears to be falling apart and that’s weighing on USD currency crosses. The greenback posted a fresh 2-month high against the euro last Friday, but has continuously fallen since then. The latest Fed meeting minutes will be released today at 19.00 BST, which should give hints on the Federal Open Market Committee’s intention towards hiking interest rates before year end.

CAD The loonie is benefiting from a lack of momentum of the US dollar and rising crude oil prices, which are now advancing on expectations that the US will repeal Iran’s nuclear deal and ban again Iran’s crude oil exports. Iran added one million barrels a day to global crude oil markets since the previous ban embargo. If one million barrels a day are retired from the market, crude oil prices could move up sharply in coming weeks. No data will be released today.

UK news

  • FT. Catalan leader steps back from immediate independence declaration Puigdemont says region has won right to become republic but calls for dialogue. Catalan leader Carles Puigdemont stepped back from making a formal declaration of the region’s independence on Tuesday as he called for more dialogue with Spain following last week’s referendum. Catalonia’s president told the regional parliament in Barcelona the region had won the right to become independent after the October 1 vote but was prepared to wait “a few weeks” as it holds talks. “I assume the mandate that Catalonia becomes an independent state in the form of a republic,” he said, prompting a long bout of applause from the pro-independence camp in the regional parliament. But he added: “I propose suspending the effects of the declaration of independence to undertake talks in the coming weeks without which it is not possible to reach an agreed solution.”
  • Reuters. May refuses to say how she would vote in another Brexit referendum May backed staying in the European Union in the June 2016 Brexit referendum but took a low-key role in the campaign. She won the top job after David Cameron, who had also campaigned to remain, resigned in the chaos following the shock result of the vote. Asked if she had changed her mind since then, she said she did not answer hypothetical questions and said her job was now to deliver what the people had voted for. “I voted remain for good reasons at the time, but circumstances move on and I think the important thing now is that I think we should all be focused on delivering Brexit and delivering the best deal,” she said on an interview on LBC radio on Tuesday.