Sterling experienced another day of bottom-dwelling and existential soul-searching yesterday, as Brexit uncertainty continued to increase. In the “views dressed as news” category a Bloomberg report did the rounds yesterday that surveyed 13 big banks on the likelihood of a no-deal Brexit by October, which they estimate to be around 30%. Furthermore, the banks add sterling will likely tumble towards low points against USD not seen since the border between Gibraltar and Spain was reopened in 1985. This morning the British pound is on a stronger footing despite The Times reporting that Prime Minister Boris Johnson would refuse to step down if he were to lose a no-confidence vote, staying committed to delivering a Brexit without a deal by October 31st. Amidst all these political woes the British Services Purchasing Manager Index managed to come in stronger than expected at 51.4 (50.4 expected. 50.2 prior), reaching its highest level in nine months. Especially the growth of new orders is encouraging, increasing to the highest growth rate since September 2018, showcasing more monetary stimulus may not be needed for the economy at this point. The focus for the coming days will stay with the staunchest Remainers of the Conservative Party. They are likely plotting to leverage the fact Johnson’s government has a majority of only one vote in the Commons, which makes a successful revolt in the form of a no-confidence vote against the current Government a plausible scenario. At the moment it is uncertain what such a vote would do for sterling, as it increases uncertainty, but also holds the potential to prevent a hard-deal Brexit by the end of October from happening.


The single currency surprised friend and foe with a sudden comeback from two-year lows yesterday and even managed to reach fresh two-week highs. As there was now obvious data point being released to explain this move, the drivers we seem to be able to discern within the smokey clouds of uncertainty are the unwinding of EM carry trades and some critical comments by Austrian’s European Central Bank representative Ewald Nowotny on new accommodative monetary policies. Meanwhile, the Final July Services Purchasing Manager Index came out a whisker below expectations at 53.2 (53.3 expected). An interesting – and not so euro positive detail from the report – was that even the booming services sector from recent economic outperformer Spain isn’t growing as fast anymore. What may be more important, is that even the Spanish growth, driven by a boom in tourism economic activity, fails to create even the mildest price pressures. This begs the painfully rhetoric question:  “if even the strongest sector of Eurozone’s best-performing country fails to blow some life into inflation, which country or sector can?”. This morning’s German Factory Orders increased unexpectedly by 2.5% in June, with positive adjustments being made to May’s reading, although without bulk orders the growth would still reside in negative territory at -0.4%.


US assets took a smashing yesterday, with the DXY index down 0.6%, the S&P 500 down 2.98%, and the Dow Jones index down 2.9% – the equity market slip was the largest in 2019 thus far. Previously, US assets performed well in the heightening of trade tensions, purely because returns in the US were relatively higher. However, despite the hawkish cut from the Fed last week, Powell gave the market a sneak peek at his playbook. The Fed’s policy reaction is likely to be a function of the development in trade tensions, suggesting previous market pricing of US rates may well be proven correct. Going forward, there is little scheduled in the data calendar in the US, with only Fed member Bullard speaking on the US economy in Washington at 17:00 BST. This will draw added attention given the uncertainty surrounding the US economy under a new blanket of trade protectionist measures. Elsewhere, eyes will be fixed firmly on the POTUS twitter account as tensions simmer. Trump was quick to address the weakening yuan yesterday, and with the heat ramping up between the two parties, rhetoric could quickly lead to further tariffs.


The loonie remained edged only slightly lower yesterday as markets focussed on momentous geopolitical developments elsewhere and Canadians enjoyed Civic Day. Crude oil prices are roughly unchanged compared to yesterday’s open, and no data will be released today – what could possibly go wrong for the loonie?

FX Elsewhere

The Chinese yuan has clawed back some of yesterday’s losses as the Peoples Bank of China outline their stance on the Rmb7.00 level being breached from the offset. Despite being labelled currency manipulators by the US Treasury last night, the central bank’s decision to set the mid-rate fixing for the onshore yuan below the 7.00 level, and below market expectations, confirmed their line in the sand for now. The move was coupled with the announcement that CNH30bn worth of bonds will be issued for sale in Hong Kong this morning, shoring up some USD liquidity in the offshore yuan market. Despite the two-pronged approach, both offshore and onshore yuan continue to trade above 7.00 due to the PBOC allowing the currency to trade in a 2% bracket from the mid-rate fixing, but the bullish stance by the Chinese central bank allowing positive EM sentiment to creep back into the market. All major EM currencies sit in the green this morning, however, that could soon change given further action by the US administration.