Sterling had an eventful day yesterday, weakening as the Bank of England’s Monetary Policy Committee decided to keep rates unchanged in a split 7-2 decision, with the dissenters in favour of a rate cut. On balance it seemed like the MPC was still hoping to avoid the insurance cuts that most of its peers have engaged in recently, and that improving global growth and falling Brexit risks will lift the economy out of its current doldrums. There was a dichotomy in the monetary policy report and policy statement, between a darkening short term outlook that may require rate cuts in the near future, and a positive medium-term outlook. A substantial pickup in business investment to almost panglossian levels of around 5% by 2021 was expected in the forecasts, driven by fiscal spending and falling political risks. There were clear nods to the possibility of a rate cut in the near future, such as Carney’s statement that monetary policy may need to re-enforce the recovery that the MPC expects to occur in 2020. Carney also acknowledged that the BoE’s forecasts were as always conditioned on market implied interest rate, which currently pricing in an over 50% chance of a rate cut over the next 12 months.


Although the size of the individual daily moves has been small, the euro has weakened noticeably against the US dollar this week, with the trend extending yesterday. This morning’s data has included a surprise jump in Germany’s Exports, which rose a healthy 1.5% month on month in September, while August’s contraction was revised upwards significantly. The euro did not show any appreciable upside on the news, but it’s possible that the boost may mean that Germany will avoid a technical recession in the third quarter. Shipments to China were still in contraction however, suggesting that one of the main causes of the current slowdown in the German economy has yet to experience a turnaround. French Industrial Production grew 0.3% in September, a third of the size of August’s contraction.


The US dollar continued to make inroads against the G10 yesterday despite the mixed messages regarding the phase-one US-China trade deal. Headlines over the week have zeroed in on the narrow trade deal and the likelihood of it beginning a phased de-escalation in tariffs. However, the optimism over a narrow trade deal wasn’t shared by the Trump administration. Economic adviser Larry Kudlow stated that “if there was a narrow trade deal there are going to be tariff agreements and concessions”. The inclusion of the word if left many scratching their heads as it marked a U-turn in progress between the US and China, despite one unnamed Trump aide being “very optimistic” over the potential for a narrow trade deal to be signed this year. Regardless, US Treasury yields continued to climb which benefitted the US dollar in what was a generally muted trading session. Today, the data calendar is light again for the dollar with only the Michigan measure of inflation expectations released at 15:00 GMT.


The loonie continued to trade in the green yesterday as positive risk sentiment helped oil prices. The same cannot be said for today as WTI reversed all of yesterday’s gains following signals that Saudi Arabia will increase production by 150,000 barrels per day to meet pre-existing contracts with Chinese investors. The loonie has followed suit, pushing up to levels not seen since mid-October. The data calendar consists of labour market releases today for CAD. Any positive surprise in data will surely allow the loonie to retrace losses sustained this morning as unemployment already sits near record lows and trend wage growth remains elevated.



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