Last night’s developments decreased the possibility of a no-deal Brexit scenario taking place, but with the full legal advice set to be published, the potential for a further rebellion over the intricacies of the Irish border backstop and transition period saw sterling fall to a 17-month low. Today, the pound holds steady despite further downside pressure mounting ahead of the reported 11:30 release of the legal text. The saga continues though as May returns to the commons to continue debating Brexit in a 5-day barrage today. But last night’s votes against the government regarding the legal text and Dominic Grieve’s amendments evidence the mountain May has to climb in a mere 6 days to get her deal through Parliament.
The euro started the session with a positive recovery against the dollar until gravity seemed to get a hold on the single currency again and EUR closed with overall losses on the day across most of the board. Uncertainty on how tariffs will affect the European automobile industry still remains among the worst concerns of investors, which shows that even the euro can’t escape being sensitive to the whims of Trump’s Twitter thumbs. Meanwhile, conversations between Rome and Brussels on the Italian budget are also weighing on the currency’s strength, with the Standard&Poor´s rating agency seeing funding costs rise for the Italian government in a volatile environment. Finally, a bright spot for the Eurozone may have come from France yesterday, where authorities seem to be willing to ease political unrest by cutting fuel taxes. This mitigates some of the earlier negative developments as riots on the Parisian street do little good for sentiments, while the strikes also hurt French Q4 growth. Today, European Central Bank President Mario Draghi will potentially address some of these issues in Frankfurt at 08:30 GMT while the Final Services and Composite PMIs for the Eurozone will be released at 09:00.
After being under pressure most of the morning, USD had a sudden change of faith midday after Donald Trump came out of the closet as a “tariff man” and wants other nations to cough up for being allowed the privilege of doing business in the US. His goal may be to “make America rich again”, yet US equities ended up in the gutter as fears rose ongoing trade wars may hurt the US economy and be a drag on global growth. The US yield curve told us as much as US treasuries with long maturities welcomed great interest, showing investors are fleeing into the more stable bond markets. This made yields on 3 year treasuries higher than 5 year treasuries for the first time in more than a decade, showing investors are also starting to consider that the Federal Reserve will have lower rates again in 2021-2022. This indicates investors consider we may be nearing “peak hiking cycle” for the Federal Reserve. Today US markets remain closed as the country mourns the passing away of former President George H.W. Bush Senior.
The loonie was taking punches from two different angles as WTI crude oil prices dropped and Trump reminded the world he doesn’t back down from slapping tariffs on anyone who desires to do business in the US. This means any hopes of removing the US tariffs on steel and aluminium on Canadian produce can be shelved for now. The loonie remains in full focus this week with an Opec meeting coming in two days and oil prices expected to be on the move. The Bank of Canada will meet today and is widely expected to stay put, but with chances of a rate hike in January being near 50/50, any hints for this meeting can cause large moves today. The November inflation bounced up again after its October dip, which should strengthen the case for a hawkish BoC, although the recent oil rout and persistently high household debt may keep the brakes on monetary policy for now.