Morning Report: 19 April 2017

19th April 2017 By: Ranko Berich

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GBP. Sterling has strengthened massively over the last 24 hours, after Theresa May made a shock announcement that she would press for the UK to hold an early General Election on June 8th of this year. There are two convincing narratives for explaining sterling’s appreciation. The first, and most popular one among pundits, is that the stronger mandate May is likely to win (should she win the election as current polls suggest) will result in less uncertainty, and, possibly, less influence from hard-line Eurosceptic members of the governing party. The less charitable explanation is that May has introduced some doubt into market pricing of sterling, which was previously completely discounting any prospect of significant watering down of the government’s “hard Brexit” plans. No opinion polls have been released since the announcement, but those made prior do point towards an overwhelming victory for May’s Conservatives, making the election currently “hers to lose”.

EUR. Yesterday’s dramatic events in the UK somewhat overshadowed the fact that the euro also strengthened significantly against USD. Little was released in terms of economic data, meaning today’s 10:00 BST release of the Consumer Price Index and Trade Balance will be the first major euro data of the week.

USD. USD came under heavy pressure yesterday as global reflationary trades continued to unwind in force and reports emerged of major investment banks abandoning long held USD long forecasts. Several mid-tier items of fundamental data were released, including Building Permits and Housing Starts, the latter of which fell short of expectation. Capacity Utilisation also increased by less than expected, despite Industrial Production increasing 0.5% in March. The details of the Industrial Production figures revealed, however, that output by manufacturers fell by the largest monthly amount since August.

CAD. The loonie did not capitalise on yesterday’s USD weakness, and instead continued to weaken alongside deteriorating crude oil prices. Foreign securities purchases soared to 38.84bn in February, led by Canadian issuances purchased by foreigners, indicating strong investor demand for Canadian assets. Today at 15:30 BST weekly US Crude Oil Inventories will be released, followed at 18:00 by a speech from the Bank of Canada’s Carolyn Wilkins.

UK news

FT: Theresa May calls snap election in bid to strengthen hand in Brexit talks. Sterling climbs on expectation of bigger Tory majority and ‘softer’ EU exit. Theresa May dramatically seized the initiative on Brexit on Tuesday by calling a snap general election on June 8, as she sought a direct mandate for her plan to deliver a smooth British exit from the EU. The pound rose on expectations that the prime minister would win a much increased Commons majority, allowing her to sideline implacable Eurosceptics in her Conservative party and ensure a phased Brexit concluding with a UK-EU free-trade deal. Polls predict a heavy defeat for the opposition Labour party, which has been in disarray under the leadership of left-winger Jeremy Corbyn.

Reuters: May’s election gamble offers longer-term turnaround for sterling, but at FTSE’s expense. Running contrary to the norm on shock election announcements, the pound’s steep gains on Tuesday point to hope among investors that the June poll may stabilize domestic UK politics as the country faces its biggest challenges in half a century. Buffeted initially by speculation over the likely content of Theresa May’s surprise statement, sterling bounced by a full cent after the prime minister called a vote for June 8, seeking to strengthen her parliamentary majority and bargaining position in talks on leaving the European Union.