Morning Report: 7 December 2016

7th December 2016 By: Ranko Berich

GBP Sterling reached a fresh high for the month yesterday afternoon, but has since begin to weaken and has opened this morning firmly on the back foot, suffering further losses with the release of weak production data. Industrial Production fell 1.3% in October, and when output from mines and utilities was excluded Manufacturing Production was similarly grim, falling 0.9%. The losses did not appear to be focussed on a single sector but were instead broad based, although the sharpest losses came from pharmaceuticals. The data run contrary to generally optimistic business surveys such as Markit’s Purchasing Managers Index, which has for several months been suggesting expansion in the manufacturing sector. Today at 15:00 GMT the National Institute of Economic and Social Research will release its estimate of Gross Domestic Product growth in the three months ended November.

EUR The euro is trading firmly this morning, holding gains against the dollar and advancing versus sterling ahead of tomorrow’s European Central Bank meeting. Although the ECB is expected to expand the duration of the QE program beyond its current deadline (March 2017), it’s unclear if the central bank will be able to weaken the euro further or not, and the outside chance remains that the Governing Council has not yet built the internal consensus to commit to a QE extension this week. The ECB is certainly not worried about diverging front end yields between the US and Germany, and with the drop in sterling this year, some sort of additional euro weakness would be welcome. However, the ECB is facing severe opposition against further interest rate cuts, which completely limits the central bank scope to weaken the euro.

USD The post-Trump US dollar rally appears to be somewhat exhausted this week. This week’s data has been very impressive to say the least, with the highest Services PMI of the last 12 months, the highest increase in month-on-month change in factory orders since September 2014, and increasing labour costs. However, the dollar has fallen against all G10 FX compared to the beginning of the month. No more tier 1 data is expected for the remaining of the week, and it will be interesting to see how the dollar behaves in coming sessions as markets start to get ready for the Federal Open Market Committee meeting next week.

CAD After four sessions of gains last week, CAD is on the back foot this week as markets reassess the impact of the OPEC agreement. Crude oil prices are declining as US shale producers could counter the output cut announced by the OPEC countries and Russia. Canadian data yesterday did not help to support CAD after the Ivey PMI fell short of expectations. Today is a crucial day for the loonie as the Bank of Canada announces its rate decision at 15:00 GMT. No interest rate cuts are expected, but the central bank could reiterate its previous dovish message, which could be translated into CAD weakness.

UK News

  • FT. UK manufacturing output declines in November. Manufacturing output declined by 0.9 per cent in the month, and was 0.4 per cent smaller than the same month last year. Economists had expected monthly growth of 0.2 per cent. The performance helped drive down the UK’s wider industrial production to its worst contraction since 2012.
  • Reuters. UK industrial output suffers biggest fall in four years after oilfield shutdown. British industrial output suffered its biggest monthly drop in more than four years in October after the temporary shutdown of a major oilfield, while factory output also sagged, official figures showed on Wednesday. While oil production is likely to bounce back once the North Sea field completes routine maintenance, the weak performance from manufacturers may raise doubts about how much of a boost they are getting from the big fall in sterling since Britain voted to leave the European Union in June.