Sterling sat flat yesterday as the dollar mildly sold off, but failed to make any substantive gains as thoughts of an extensive Brexit related slowdown in the UK economy continues to linger. This weekend, the postal votes are sent out to the 150,000 conservative party members while hustings continue. Both members have the next 36 hours to rattle up votes as the contest reaches its most important weekend. In an unexpected turn of events, the Johnson campaign wins the support of the Daily Telegraph. Arguably this was always in the pipeline with Johnson on the Telegraph’s books for £275,000 a year such that they could secure a weekend periodical. The front page reads “Mr. Johnson is Mr. Brexit” today, as both parties pull out the final weapons in their arsenal ahead of this weekend. Johnson has also pulled out his chequebook once again, not to pay for the Telegraph’s endorsement but to pledge a reduction in stamp duty.
The euro was one of the main beneficiaries of yesterday’s slow session as it stood to gain most of the G10 currency board despite slightly soft Retail Sales. These figures saw a slower increase than expected at 0.3% in May, which was mostly caused by weak German data while the performances were solid elsewhere. Germany remains the laggard of the Eurozone at the moment as German Factory Orders this morning plummeted by 2.2% month on month in May. This brings a strong negative risk for industrial production in Q2 going forward, risks which will weigh on Q2 German growth as a whole.
G10 currencies appeared to celebrate the fourth of July US Independence Day with a muted trading session in which all currencies closed no further than 50 points from their opening levels against each other. For those who love their peace and quiet, now may be a good time to get out of the markets because the Non-Farms labour market data this afternoon has the potential to completely turn this situation around. If we see an upside surprise with inflation-boosting average hourly earnings growth and/or employment growth comes in above 250K, then markets and the Federal Reserve will be in for an uncomfortable confrontation. Markets currently price in more than a full rate cut for the July meeting, but if the labour market report proves to be booming, even a precautionary Fed rate cut may suddenly start to look premature. On the other hand, if we will be confronted by disappointing job and wage increases, following on the weak May Report, then the narrative of a weakening US economy suddenly gains substantial credibility. This would speculation about a 50 basis point cut back to the forefront, which will weigh on the dollar in the short-run. For the record, we should mention that we do not consider a 50 basis point cut in July likely, even if today’s labour market report surprises to the downside.
The loonie cracked fresh 2019 highs against the US dollar yesterday with yield spreads compressing further. The fact that the loonie continued to rally despite a lack of data and a bank holiday in the US highlights the Canadian dollars prime position to benefit the most in the G10 from a weakening dollar. After the unemployment rate dramatically fell from 5.7% to 5.4% in May, investors will be keeping a close eye on today’s labour market release. If it surprises to the upside, with expectations sitting at 5.5% for the unemployment rate, it would reinforce the divergence in the economic surprise index. Currently, the spread between the surprise in US and Canadian economic data sits at its widest since 2008, evidencing the prime spot the loonie sits in.