Morning Report: 27 March 2017

27th March 2017 By: Ranko Berich

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GBP.  Although the impending activation of Article 50 looms this week, sterling is higher against most of the G10 currencies this morning. Markets appear to be beginning to realise that a worst-case version of Brexit seems to have been priced-in, given that sterling is currently trading at thirty year lows, despite having robust growth, low unemployment and the prospect of rising interest rates. The glimmer of renewed optimism was sparked by reports over the weekend that the UK is set to keep key European Union regulation- largely because there is little time to substitute specific organizations, specifically in matters such as agriculture, fishing and immigration. As a result, 10 Downing Street could soft its stance towards the EU trade arrangements, which could benefit the outlook for the UK once the process of leaving the EU has formally began.

EUR.  Like most major currencies, the euro is higher today against the dollar, though weakening against the pound. Markets were buoyed somewhat by an impressive, and unexpected, victory for incumbent German Chancellor Angela Merkel’s party in the German region of Saarland. Merkel’s Christian Democratic Union (CDU) posted its biggest win in 13 years, underscoring the challenge facing the Social Democratic Party trying to deny the CDU a fourth term. This has helped further reduce some of the perceived potential political risk that has dogged the single currency over recent months, given that Merkel is up for re-election later on this year.

USD.  The US dollar has fallen sharply in the Asian session’s opening after Trump’s healthcare reform could not be passed in Congress last Friday, posting the President’s first big fiasco at his first big vote with lawmakers. One of his biggest campaign promises, the healthcare reform was postponed indefinitely as the Trump administration did not manage to get enough support from his own party to pass the bill. This raises a question mark about Trump’s remaining economic agenda, as markets become less confident that Trump will manage to pass other important reforms, such as the critical tax cuts announced. No data will be released today, but Evans and Kaplan, from the Federal Reserve, speak at 18.15 GMT and 11.30 GMT.

CAD.  The loonie is benefitting from the USD’s sharp drop this morning, at the same time last Friday’s better than expected core inflation data boosts the optimism following a good series of data releases recently. The week is very slow in terms of macroeconomic events, and the loonie could keep trading on foreign developments.

UK news

FT: UK set to keep EU regulations after Brexit. No time to replace key agencies before departure, officials say. Theresa May is looking to keep Britain under the remit of some EU agencies after Brexit, in an admission that the UK does not have the time or expertise to replace European bodies with a new British regulatory regime within two years. As the prime minister prepares to officially fire the starting gun on Brexit talks on Wednesday, officials close to the negotiations say that the UK would have little choice but to take part in some EU agencies after 2019, the scheduled date for Britain’s departure from the bloc, despite pressure from some Brexiters for a clean break. “We simply don’t have the expertise in some areas and wouldn’t have the time to start up new agencies from scratch,” said one.

Reuters: UK manufacturers urge PM May to drop threat of no Brexit deal. Britain’s manufacturers told Prime Minister Theresa May on Monday to drop her threat that she might take the country out of the European Union without a new trade deal, saying they would bear the brunt of trade barriers with the EU. May plans to trigger the two-year Brexit process on Wednesday and she has warned the other 27 EU countries that no deal would be better than a bad deal. “The idea of being able to walk away empty-handed might be a negotiating tactic, but it would in reality deliver a risky and expensive blow,” Terry Scuoler, chief executive of EEF, Britain’s manufacturing lobby, said.