Sterling continues to trade off of broad US dollar moves as headlines regarding Brexit subside. Today, the General Election campaigns officially start with Parliament dissolved, although for all effects and purposes campaigning has been happening for several weeks at least. The tone of the election looks set to be acrimonious, to say the least, with the Prime Minister writing in the Daily Telegraph, his former employer, to compare Jeremy Corbyn to Stalin. Yesterday’s main data point was Markit’s Services Purchasing Managers’ Index, which rose to 50.0 in October, a marginal improvement in September. The details of the report continued to make for sobering reading about the UK economy’s dominant services sector, with the employment sub-index continuing to suggest net falls in employment.
The euro has fallen substantially given the broad US dollar strength this week, despite a narrow US-China trade deal benefitting the Eurozone economy from a standpoint of increased external demand. The net stimulus for the Eurozone economy is less than to both the US and China’s and is arguably why the single currency has lost ground to both USD and CNY at the beginning of the week. However, the possible signing of a trade deal will come as welcome news to new ECB President Christine Lagarde. Yesterday’s PPI release came in bang on expectations and provided no support to the euro, which has fallen 0.8% over the course of the early part of the week. Today, the data calendar is stacked yet again with final readings of member states October PMIs and the Eurozone composites. At 10:00 GMT, September’s Eurozone retail sales data is also released.
The US dollar continued Monday’s rally yesterday as trade optimism continued. The greenback found an extra source of stimulus in the form of the ISM non-manufacturing index, which came in at 54.7 compared to expectations of a reading of 53.5. Back in October, the release of the September non-manufacturing index compounded fears of a broader economic slowdown following the ISM manufacturing report. The downturn in both releases prompted fixed income markets to aggressively price in a rate cut by the Federal Reserve at the end of the month. Despite the uptick in the reading, the index should normally be around the 58-59 mark according to Pantheon Economics given the strength in core retail sales, highlighting the impact of the US-China trade war after the imposition of tariffs on consumer goods on September 1st. Should the September 1st tariffs be rolled back, as headlines suggest in order for the phase one deal to be signed, and the December 15th tariff is delayed, the ISM indices will begin to mean-revert. For now, it is hard to look past the US dollar under the prospect of a deal being signed. Since Friday, US treasury yields have increased substantially, especially over the medium to long-term horizon. Today, however, the greenback has retraced slightly with the yen making some ground in Asian trading hours.
It was much of the same for the loonie yesterday as it continued to weather the storm of broad USD strength, ranking only second to the Australian dollar which was helped by a net hawkish RBA. The loonie has benefitted from a rebound in crude as the prospect of a narrow trade deal will bring fresh demand stimulus. However, the rebound in WTI crude has lost some steam today, with reports pointing to a larger than expected build in inventories in today’s EIA report. The API report for the week ending November 1st saw inventories rise by roughly 4.3m barrels, causing WTI to slump in this morning’s trading. The more rigorous EIA report is due out this afternoon, but with the API index highlighting a positive surprise in inventories, many expect a repeat in last week’s reading with the EIA counterpart where inventories build by 5.7m barrels compared to expectations of a 500k barrel build. The EIA report is released today at 15:30 GMT, and with little on the data calendar for both the US dollar and CAD, the pair will be keeping a close eye on the oil market’s reaction to the report.