The Brexit news flow remains subdued as May continues to try and squeeze some blood out of the stone built wall that is the EU 27. Meanwhile, it has been broadly covered that Olly Robbins, the senior Civil Servant that has driven Brexit negotiations behind the scenes over the last few years, warned May against whipping for Brady’s amendment. Robbins stated that the EU is not open to negotiation on the Irish border, and has recently been scrutinised by eurosceptics within the majority party. In a Brexit team “reshuffle”, Attorney General Geoffrey Cox and de facto deputy Prime Minister David Lidington will join the negotiating party.


Yesterday the euro pared back some of the strength it had gained earlier, on the back of poor signs of economic performance released during the day. Preliminary GDP data indicates Italy had a 0.2% contraction in Q4, suggesting the country might have entered in a technical recession. The Eurozone overall performed in line with expectations, with a mild expansion of 0.2% in the last quarter of the year. The German data, however, to be released in February 14th, holds most of the attention. A negative GDP growth for a second quarter in a row could signal that the decline in the German activity is not as temporary as previewed by the European Central Bank. The EURUSD reaction after the comments by the Bundesbank President, Jens Weidmann, warning on downside risks and below-potential growth in 2019, revealed the worst market´s fears. Today, the Eurozone Consumer Price Inflation data will come out at 10:00 GMT, most likely showing the case that the ECB should still be far away from starting monetary policy normalisation.


Yesterday the greenback was mixed against major currencies on a day that saw progress on US-China trade talks, while the budget stalemate over the Mexican border wall seems to deepen. With only one month to go to the end of the trade truce between the US and China on the first of March China pledged to purchase more US goods. This pleased the President of the USA as Trump acknowledged that he sees the negotiation teams have made “tremendous progress”, while he does warn this “doesn’t mean we have a deal”. Trump might prefer negotiating with the communist Chinese over finding compromises with his domestic Democrats as he sees progress in the trade talks, but calls the plan presented by a bipartisan committee to prevent another government shutdown “a waste of time” as long as it doesn’t include funding for his wall. Meanwhile, New Home Sales jumped to 657K in November, well above the 570K consensus, showing a nice rebound in sales activity after a string of natural disasters suppressed sales in the housing market since Summer. Today all eyes will be focused on the 13:30 GMT labour market report that contains Average Hourly Earnings, Non-Farm Employment Change and the unemployment rate. It will be interesting to see how the government shutdown affects the figure, though for now, most analysts consider the impact will be minimal on the strong US job market.


The loonie traded in a flat mood yesterday, following a day of juicy profits against the US dollar. The release of the November GDP growth could have prevented the currency from keeping on the bullish track. Relative to the previous month, the economy contracted by 0.1%, the second time in three months. This result adds to an annualised growth of 1.7% in November from 2.2% previously, clearly signalling the slowdown pace to which the economy has embarked in 2018. Remarks from Bank of Canada´s Governor Stephen Poloz earlier this month, seem to be confirmed by this poor performance and prospects for monetary policy tightening keep moving further away. Today, the release of the January Markit Manufacturing Purchasing Manager Index at 14:30 GMT will provide more clarity.

FX elsewhere

Last month the disappointing Chinese Manufacturing Purchasing Manager Index was one of the triggers for the flash crash in USDJPY, and this morning’s soft edition is again sending ripples through the FX oceans. The Caixan PMI that covers smaller, privately owned manufacturers dipped for the second month in a row to 48.3, it’s lowest point since February 2016. The slowdown in the manufacturing sector of the Asian giant seems to be caused mostly by fewer new domestic orders as new export orders actually rebound after last month’s contraction. A positive view one can take on this is that this slowdown in manufacturing activity may make the Chinese more eager to reach an agreement with the US on trade in talks the coming month. For now, however, the CNY isn’t feeling so positive about all of this as it drops from a 6-month high against USD put on the boards earlier this week.