Morning Report: 4 July 2017

4th July 2017 By: Ranko Berich

GBP Sterling weakened significantly versus USD yesterday, as the greenback finally showed signs of life, and political back and forth continued over public sector pay. This morning sees the choppy trading in sterling continue, as two Bank of England rate-setting members gave opposing views on the outlook for monetary policy in the UK. In an interview with a North Wales newspaper, Ian McCafferty said that in his view rate hikes would be “prudent” in the near future. McCafferty is a known hawk and has already voted for raising interest rates, so the statements are hardly a surprise. Conversely Gertjan Vlieghe, a dovish member of the Bank of England’s Monetary Policy Committee, told The Independent that “this is an environment where a premature hike would be a bigger mistake than one that turns out to be slightly late”. Aside from this, Markit’s Manufacturing Purchasing Managers Index was released yesterday, and fell to 54.3 in June, significantly below expectations. The result indicates growth in the sector, as reported by the surveyed manufacturers, slowed at the end of the second quarter despite strong external demand due to sterling depreciation. Today at 09:30 BST, the equivalent Construction PMI will be released.

EUR The euro also headed lower against USD yesterday, although the raft of manufacturing surveys released were generally positive. In particular, the German and overall European Manufacturing Purchasing Managers Indices surged into the high 50s, indicating rapid growth in the sector. This morning’s data has included a smaller than expected drop in Spanish Unemployment, which fell by 98,300, bringing Unemployment to its lowest level in 8 years. At 10:00 BST the Producer Price Index will be released.

USD After weeks of either trading sideways or selling off, the US dollar started this week with gains versus the entire G10, only paring back its gains slightly overnight. Yesterday’s data included a strong print on the ISM Manufacturing Purchasing Managers’ Index, which rose to 57.8, a high reading, although the equivalent Markit Manufacturing PMI was less optimistic. Total Vehicle Sales were slightly soft, falling to 16.5m in June. Market nervousness regarding the ongoing political tensions with North Korea also helped risk assets such as the dollar, with the announcement that the rogue nation had successfully launched yet another missile, reportedly falling in to Japanese waters. The US celebrates the Fourth of July holiday, and most businesses will close.

CAD The Canadian dollar resists above a strong resistance against USD, supported by hawkish comments by Bank of Canada’s Governor Stephen Poloz, at the same time crude oil prices continue to recover. Poloz indicated yesterday that inflation should be “well into an uptrend” in the first half of 2018, as the output gap in Canada’s economy closes. Manufacturing PMI will be released today at 14.30 BST.

UK news

  • Reuters: UK factories lose pace as exports slow despite weaker pound. British factories grew more slowly than expected in June as export orders rose at the weakest pace in five months, according to a survey on Monday that might disappoint Bank of England officials who favour raising interest rates. Sterling, which jumped last week on expectations of a BoE shift towards higher borrowing costs, fell after the Markit/CIPS UK Manufacturing Purchasing Managers’ Index(PMI) slipped to 54.3 from a downwardly revised 56.3 in May, a three-month low.
  • FT: North Korea claims first long-range missile launch. Trump calls on China to ‘put a heavy move’ on Pyongyang to ‘end this nonsense’. North Korea has risked provoking a confrontation with the US after it claimed a rocket it fired on Tuesday was its first intercontinental ballistic missile launch. The test firing off the country’s east coast saw the missile fly for 40 minutes and reach an altitude of more than 2,500km, characteristics that led analysts to give the North Korean claim some credibility. They said such a long-range missile could reach Alaska.