Morning Report: 15 August 2017

15th August 2017 By: Ranko Berich

GBP Sterling hovered near year lows against the euro yesterday, and weakened further against the US dollar, although GBPEUR has seen some upwards movement this morning. Reports emerged that the UK would be seeking to continue its current customs arrangement with the EU for several years after Brexit, according to a government paper that will be published today. Apart from a small bump against the euro this morning sterling has not reacted significantly, suggesting that perhaps a bigger question for the pound is not what the Government’s wish list consists of, but what the outcome of negotiations will actually be. Headline UK data will be released today at 09:30, with the Office for National Statistics releasing indices for Consumer, Retail, Producer and House Prices. After last month’s dip in year on year inflation brought the Consumer Price Index back into the Bank of England’s expectation range, a modest increase to 2.7% inflation in the CPI is expected.

EUR The euro weakened to USD yesterday and has not managed to rally overnight. Yesterday Eurozone Industrial Production data showed production contracting 0.6% across the eurozone in June, after a 1.5% expansion previously. This morning’s data has included German Gross Domestic Product growth, which showed the EU’s biggest economy growing at 2.1% year on year, the fastest rate since 2014. The news comes as it is becoming increasingly clear that the European Central Bank is likely to begin to look to remove some of its current, extreme levels of monetary accommodation at some stage in the next 12 months. No further headline euro data will be released today, and a number of nations will observe the Assumption Day holiday.

USD USD rallied on a broad basis yesterday, and has extended its gains this morning. New York Federal Reserve chief Bill Dudley said that he favoured another move upwards in interest rates this year, seemingly contradicting the recent tone of some of his Fed colleagues, and certainly contradicting the overwhelmingly dovish pricing of front-end US fixed income markets. Wage inflation remained key to Dudley’s outlook. And if Average Earnings growth indeed picks up towards the end of the year he is likely to be joined by a chorus of newly converted hawks at the Fed. The afternoon’s data will include Retail Sales and the Empire State Manufacturing Index at 13:30 BST, followed by Business Inventories and the NAHB Housing Market Index at 15:00.

CAD The loonie is well and truly on the back foot against USD this week, weakening consistently from Friday’s levels against USD. Foreign Affairs Minister Chrystia Freeland spoke in Ottawa yesterday, outlining Canada’s objects for NAFTA renegotiation. Some of the principles included were more labour and environmental protection, and with the first round of talks commencing on tomorrow Freeland warned of potentially “dramatic moments” ahead.

UK news

  • FT: UK looks to retain Brussels customs deal. Brexit paper seeks frictionless trade — but EU blessing may be needed for new trade talks. Britain will seek to continue its current customs arrangements with the EU for several years after Brexit, in a victory for supporters of a smooth transition. A government paper to be published on Tuesday makes clear that the UK wants to remain in a customs union with the EU for at least the estimated three years of transition after Britain’s 2019 exit. The plans appeared to be a victory for the chancellor Philip Hammond, the government’s leading advocate of a soft transition, and will reassure business leaders who have warned for months about the dangers of a “cliff edge” for exporters when Brexit takes place.
  • Reuters: Approaching a cliff edge? British business begs for clarity after Brexit maelstrom. After the maelstrom of Prime Minister Theresa May’s election crisis and a struggle in government over the shape of Brexit, business chiefs have a simple request for Britain: Give clarity on how the EU divorce might look. Since May nearly lost her job in a botched June 8 election gamble, ministers have sought to strike a more inclusive tone, even inviting in some chief executives to a 17th century manor house to discuss Brexit over a buffet lunch. But as the March 2019 exit date approaches, six major British business chiefs told Reuters they still do not have the answers about post-Brexit immigration, trade and regulation they need to plan and make coherent investment decisions.