Morning Report: 22 September 2017

22nd September 2017 By: Ranko Berich

GBP The hard Brexit or Soft Brexit drama that has dominated UK politics over the last 15 months may be about to conclude today. Theresa May will speak before her European counterparts to finally give specific details on the UK’s position on Brexit related issues such as EU citizens’ rights and the divorce bill. If May’s speech is welcomed around the EU capital cities, the second stage of the negotiations would be clear to begin this autumn, where issues such as bilateral trade agreements would be discussed. This is a critical area for sterling and for the country’s financial services sector.

EUR The single currency has completely recovered this week’s losses against the dollar and currently trades above the week’s opening level. A number of Purchase Manager Indices have been released in the euro area this morning, showing a new increase in growth in France and Germany, as opposed to expectations for a moderation. The Euro area manufacturing PMI rose to a six and a half years high in September, highlighting once again the excellent performance of the sector in the euro area. The result suggests that growth in the euro area will hit 0.7% in the third quarter, a 2.8% annualize rate of growth.

USD The US dollar pared all the post-Federal Markets Open Committee meeting gains over the last two days as a risk-off tone permeated markets yesterday with the yen and gold advancing, whilst at the same time, treasury yields slipped from this week’s highs. The US imposed new sanctions on North Korea, which is a concern for markets, and Russia threatened to bomb US troops if its own troops are fired upon. The Russian Defence Ministry indicated that Russian Special Forces, fighting alongside Syrian forces, came under US allies’ bombardment twice. A second line of communication has been set as Russia said that “those areas will be destroyed” if it happens again. Elsewhere, Manufacturing and Services Purchase Manager Indices data will be released today at 14.45 BST.

CAD The loonie is recovering against the dollar, similarly to other G10 currencies, but USDCAD remains within the range of the ascending channel that begun early in September. Crude oil prices continue to recover and a risk off tone harmed the dollar in yesterday’s session. Today is a critical day for the loonie in terms of macro data. Inflation and retail sales releases are expected at 13.30 BST, which could well increase expectations of an interest rate hike in Canada after a somewhat dovish statement from the Bank of Canada recently.

UK news

  • FT: Theresa May to offer stronger protection for EU citizens in Florence speech. PM calls for EU to be ‘imaginative and creative’ in finding Brexit solutions. Theresa May hopes to break the stalemate in Brexit negotiations in a defining speech in Florence on Friday by vowing to strengthen legal protections for EU citizens living in the UK. Brussels has demanded the 3m EU nationals in the country have direct recourse to the European Court of Justice to ensure the rights they currently have in Britain are safeguarded after Brexit. But the prime minister’s aides have told European diplomats to expect a proposal to ensure UK courts enforce the rights of EU citizens. Rather than transpose specific policy provisions of any citizen rights deal into domestic UK law — and run the risk that MPs “dilute” the measures, as EU officials fear — parliament would instead make the relevant terms of the exit treaty directly enforceable in UK courts. British officials have also told negotiators they are considering whether future ECJ case-law should be “taken into account” by British judges where relevant to the citizen rights — another key Brussels demand.
  • Reuters: Boost for Hammond as UK posts smallest August budget deficit in 10 years. Britain unexpectedly posted its smallest budget deficit for any August since 2007, helped by record sales tax revenues that could give Chancellor of the Exchequer Philip Hammond room to relax his grip on spending in an upcoming budget. The deficit in August stood at 5.7 billion pounds, down 18 percent compared with the same month last year, the Office for National Statistics said on Thursday, citing figures that exclude state-controlled banks. The shortfall for August was smaller than all forecasts in a Reuters poll of economists that had pointed to a much larger deficit of 7.1 billion pounds.