Morning Report: 28 September 2017

28th September 2017 By: Ranko Berich

GBP Sterling continue to strengthen against the euro, although it fell to a two-week low against the dollar yesterday. Retail sales data in the UK was very positive yesterday, with the CBI retail sales index unexpectedly rising to +42 versus expectations of +8, a huge print that aligns perfectly with the Bank of England’s view on domestic consumption and that, at the same time, is a condition for possible interest rate hikes in the near future. Andy Haldane, the Bank of England Chief Economist, said yesterday night that he and other members of the central bank see encouraging signals for future wage growth, which could well support such hike in the near future. No data will be released in the UK today, but Theresa May will speak at the Bank of England’s conference celebrating 20 years of independence in London.

EUR The euro weakened further yesterday as the German elections drag down any positive sentiment in the single currency. End of the quarter currency flows and portfolio allocations could do little to help the euro as its significant appreciation over the last three months may force some rebalancing. The German GfK Consumer Climate indicator fell marginally below expectations, although it remains very close to the last month’s all time highs. No more data will be released today.

USD USD was well bid yesterday, and continued to strengthen against a number of major currencies, notably CAD, NOK, and AUD. The dollar’s gains against the euro were smaller in percentage terms, but EURUSD did reach fresh lows for the third consecutive day. The Trump administration and senior Republican lawmakers unveiled the outline of a tax reform plan that sought to slash corporate taxation and make reductions to personal income taxes. Steve Rosenthal called the plan “ill-formed”, noting that it consisted of principles and little content. Nonetheless, the release of the plan represents progress in a critical issue for USD, and developments will bear watching closely. Today at 13:30 BST revised Gross Domestic Product data will be released, alongside Unemployment Claims, the Goods Trade Balance, and Wholesale Inventories. The Fed’s Stanley Fischer will speak at 15:15.

CAD The loonie plummeted yesterday after the Bank of Canada’s Stephen Poloz speech yesterday contained several dovish hints that suggest market expectations of further rate hikes in the immediate future may be overdone. Poloz made it explicitly clear that the Bank of Canada is not on a mechanical path towards higher rates, and repeated that future hikes are unlikely to maintain the pace seen recently. As a result, the Loonie – which is trading some 3 per cent weaker than the multi-year highs seen against the USD earlier this month – may struggle to regain its momentum in light of today’s speech.

UK news

  • Reuters: BoE’s Haldane – pay signs encouraging, rate hike would be good news. Bank of England Chief Economist Andy Haldane said he saw encouraging signs of pay growth and any increase in interest rates should be seen as a “good news story” for Britain’s economy, Sky News quoted him as saying on Wednesday. Haldane also said he was among of the majority of BoE rate-setters who, at their meeting this month, felt that Britain’s first interest rate hike in a decade might be needed in the coming months. “In the September minutes in particular, a majority of the committee – of which I am one – said that we could be nearing the point where a reduction in some degree of monetary stimulus might be warranted in the coming months,” Haldane said.
  • FT: May to mount defence of free market to challenge Corbynism. Prime minister’s speech seeks to take fight to Labour leader on economy. Theresa May will tonight mount a robust defence of the free market, in an acknowledgement that the Conservatives have for too long failed to take the fight to Labour leader Jeremy Corbyn on the economy. Mrs May will call a well-regulated free market “the greatest agent of collective human progress ever created”, adding that it was “the only sustainable means of increasing living standards of everyone in a country”. Cabinet ministers admitted after this year’s election that the Conservatives had made a strategic mistake in failing to fight Labour on the economy, allowing Mr Corbyn to make the case for state intervention almost unchallenged. “We thought we had won the argument for the free economy but we are going to have to start making it all over again,” said one minister.