Morning Report: 14 August 2017

14th August 2017 By: Ranko Berich

GBP Although sterling has started this morning little changed against the US dollar, it is perhaps a sign of market nervousness over the pound that it has started to trade in line with so-called “risk” currencies, in particular the Australian dollar. The theory is that when markets are confident, they tend to buy in to more volatile currencies, given the potential returns have historically been higher. However, when markets are nervous, they seek traditionally strong and stable currencies, such as the Swiss Franc or the Japanese Yen. Throughout the Eurozone crisis, the pound had at various times also served as such a haven for markets. However, even the Bank of England’s most hawkish member Michael Saunders, a man who has voted in favour of an interest rate hike at the past two rate-setting meetings, gave an interview on Friday saying that he believed the effect of Brexit would cost the UK “5 percentage points over a 15 year period” in economic growth. Combined with the UK’s bond market ever-diminishing in stature on the global stage, and a disconcerting run of economic data earlier this year, market confidence in GBP seems to be consistently sapping. Given that tensions continue to simmer between the US and North Korea, this opens up the possibility of yet further more GBP weakness should the situation escalate. Of course, a run of robust economic readings could change all this, and Tuesday provides the first opportunity for sterling to impress, with the release of the year-on-year Consumer Price Index measure of inflation.

EUR The euro starts the week once more on the front foot, with the absence of any further data releases on Friday apparently simply providing an opportunity for markets to buy back in to the single currency. Although the euro hasn’t reached fresh highs against the USD dollar for almost a fortnight now, the longer term upward trend does still appear to remain very much intact. Moreover, the euro continues to pummel GBP, currently sitting only slightly above its 2016 low- leading several newspapers this morning to run articles on the prospect of EURGBP reaching parity before year end. With quarterly German inflation at the highest level since 2008, and Eurozone quarterly GDP growth the highest since 2011, if we see a good reading from tomorrow mornings Manufacturing and Service sector data releases, it could well help propel the euro to yet more fresh highs.

USD The US dollar continues to be somewhat of a lame dog, with another underwhelming monthly inflation reading of 0.1% on Friday causing the currency to remain on the back foot against most of its major peers. With this being the fifth consecutive month that inflation has been below forecasts, and continued political uncertainty due to the strain with North Korea, US equities are also starting to suffer, ending the week down a cumulative 1.4%, which represents its worst performance since March. Nonetheless, with the “VIX” measure of equity volatility reaching its highest level this year, US retail sales and Federal Open Market Committee minutes published this week, and the global central bankers Jackson Hole Symposium set for this weekend, there is certainly scope for plenty of movement into the second half of the month.

CAD The Canadian dollar saw a brief but sharp spike of strength against the US dollar on Friday, as markets reacted to disappointing inflation data in the US. Although the move was short-lived, it does show the markets readiness to buy back in to loonie, which had been enduring a retracement against USD over the past week after a three month period where CAD had strengthened by 10%. The most significant data releases this week will be Canadian monthly Manufacturing sales on Thursday, and monthly inflation data on Friday.