Democratic Unionist Party support for Theresa May’s Brexit ‘Plan B’ gave sterling a huge boost overnight, as the currency rose to a respective 2 and 20 month high against USD and EUR. “The Sun” newspaper, not to be confused with the Aztec Sun God Huītzilōpōchtli, reported this morning that the threat of a softer Brexit deal pushed the DUP to pledge support to May’s plan in a private meeting. Whether this will give the government enough support to pass the bill is not yet clear, but the final form of the Brexit withdrawal deal does now appear to be taking shape. It remains our belief that an extension in Article 50 is the likeliest outcome, given the tight turnaround period any new deal will face, but for now the signs for sterling remain positive as it continues to erode the no-deal discount it was previously trading under.
Weak survey data and a monetary policy press conference with little to cheer about pushed the single currency to a 6-week low yesterday against the dollar and contributed to a 20-month trough against sterling this morning. Yestermorning’s trading session already had a false start for EUR as Purchasing Manager Indices dropped to their lowest point since 2013, which then was in the middle of the European sovereign debt crisis. Subsequently, faith in the single currency’s was not aided by a European Central Bank rate announcement and press conference in which even Sherlock Holmes himself would have had a hard time to find a clue of optimism on the Eurozone’s growth situation. Tightening labour markets and wage growth were hailed by ECB President Mario Draghi as the forces that keep up the ECB’s confidence in its inflation forecasts. Nevertheless, Draghi spend more efforts during the presser fending off journalists who were probing about when the slew of negative Eurozone data is going to translate into more dovish monetary policies. Draghi stuck to his guns, kept his cards to his chest and decided for now it was time to walk and not to run, resulting in acknowledging the slowdown but not talking about any extra accommodative steps.
Yesterday, the dollar registered gains across the entire G10 currency board in a day of broad market volatility. First, the currency was strengthened by the poor PMIs coming from the Eurozone as a preview of the dovish tones in the ECB stance later in the day. In comparison, the lower than expected levels of unemployment claims reported in the US in January, along with US Flash Markit PMIs outperforming expectations, provided further strength to the greenback. A fresh wave of risk-off moves brought the final touch of the day after the Commerce Secretary Wilbur Ross highlighted that a trade deal with China is “miles and miles” away from being reached. Markets took this statement to be a hint of the further uncertainty ahead of a high-level trade meeting to be held next week with China. Meanwhile, a solution to the government shutdown keeps moving further away in time after two bills aiming at setting a truce, failed to gain support in the Senate. Both President Donald Trump and the Democrats seem unwilling to cave on their positions so far.
The loonie likely saved its strengths yesterday as it traded flat against the greenback, while it rushed out of the starting blocks this morning with a ferocious rally. US crude oil imports from Canada reaching a record high can play a role in this, as heavy sour oil is becoming more valuable given the OPEC+ cuts. Also, the political crisis in Venezuela handicaps one of Canada’s main competitors in the oil markets in the Americas, further improving the prospects of the Canadian oil sector, and thus of the loonie.