Sterling sold off yesterday following the best 2-day rally in a decade at the back-end of last week. Comments from the EU’s Chief Negotiator, Michel Barnier, trimmed optimism in financial markets that a deal was likely prior to the EU summit at the end of the week. The Financial Times writes that Barnier stated he is baffled by the UK’s solution to fix the Brexit backstop when discussing the plan with other diplomats. By recent measures, however, the Brexit chatter was muted yesterday outside of the Barnier headlines as Parliament re-opened with the Queen’s speech. Barnier’s scepticism weighed on the pound yesterday for most of the day, pushing it a percentage point lower against USD at one point, but a flurry of optimism re-emerged late on in the US session. The Telegraph cited sources in Brussels and London saying negotiations yielded a possible solution to the Irish border. Johnson has cancelled today’s Cabinet meeting to stem potential leaks as he pushes for a deal to take to the EU summit on Thursday. This morning, Barnier has reversed some of yesterday’s scepticism saying negotiations are intense and a deal is still possible this week. Sterling will continue to be pushed around by Brexit headlines, with any rally/ fall only sustainable if the succeeding headlines follow suit.
The euro has remained serene amid a turbulent global market picture, trading broadly flat since yesterday morning against both GBP and USD. The results of the ZEW survey of institutional investors and analysts will be released this morning, released as usual in two reports, the more widely followed pertaining to the German economy in particular, accompanied by one for the Eurozone as a whole. Germany’s economy has been putting out some dismal data recently, with hard output data and survey data pointing towards a collapse in the manufacturing sector that has probably dragged the economy as a whole into recession. The last two months German ZEW releases have told a worrying story. August’s index reading for the Indicator of Economic Sentiment, a measure of expectations for the future, was -44.1 the lowest since the depth of the Eurozone crisis in 2012. September showed a bounce to -22.5 for the expectations index, although the index tracking the assessment of the current situation worsened further. October’s survey results will be released at 10:00 BST.
US-China trade sentiment turned negative, allowing the dollar to make some progress against the G10, especially against risk-sensitive currencies such as NZD, GBP, NOK and AUD. Bloomberg reported that China wanted more talks to finalise the details of the “phase one” trade deal supposedly agreed last week, while Chinese state media demurred from confirming a deal had been finalised. Chinese officials stated that they want the planned December 15 increase in tariffs, which would see all $550bn worth of imports become subject to a further 15% blanket tariff, taken off the table. Treasury Secretary Steven Mnuchin said yesterday that without a final deal tariffs may increase in December. The widening of expectations from both parties, along with the reiteration of further tariffs from the US, sent risk-off undertones through markets yesterday. US involvement didn’t stop there, however. Late last night the Trump administration called on Turkey to declare an immediate cease-fire in Syria while sanctioning three Turkish officials and increased steel tariffs to 50%. Trump spoke to President Erdogan yesterday and Vice President Mike Pence is on standby to lead a delegation to Ankara if requested.
Negative surprises in Chinese trade data along with a mild reversal in US-China trade sentiment sent crude oil lower yesterday. The haven flow also boosted the greenback. Both moves joined forces to send the loonie marginally lower against the greenback, paring some of Friday’s post-labour market report gains. There is little on the data calendar in terms of top-tier releases for the loonie today. USDCAD will likely trade off of the development in US-China trade talks and whether the “phase one” will eventually get signed.