Cable Crushed by Brexit Burden

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Market Drivers September 5, 2018
UK data beats but cable dips below 1.2800
BOC in view
Nikkei -0.51% Dax -0.84%
Oil $68/bbl
Gold $1193/oz.
Bitcoin $7100

Europe and Asia:
GBP UK PMI Services 54.3 vs. 53.9
EUR EZ Retail Sales 1.1% vs. 1.3%

North America:
CAD Trade 8:30
USD Trade 8:30
CAD BOC Decision 10:00

The dollar remained bid in Asian and mid-morning European trade as risk-off flows continued to dominate the markets with both Nikkei and Dax lower by more than 50 basis points.

Cable was particularly weak as EU officials rejected the chequers plan put forth by PM May and offered a Canada like deal with the union which would allow access to goods but leaves the issue of services unresolved. Given the fact that UK economy is 70% service driven such a deal would leave a lot of open questions especially the country’s crucial finance sector.

Sterling drifted lower all night and dipped below the 1.2800 level despite the fact that UK Services PMI beat at 54.3 vs. 53.9 eyed. The gage hit its second-highest reading since February but business optimism hit a five year low as Brexit concerns continue to weigh. According to Markit, “The survey data indicate that the economy is on course to expand by 0.4% in the third quarter, a relatively robust and resilient rate of expansion that will no doubt draw some sighs of relief at the Bank of England after the rate hike earlier in the month. “Faster service sector order book and employment growth also offset slowdowns of both in the manufacturing and construction sectors, but also highlights the extent to which the economy has become more reliant on services to support growth, and in particular an especially strong financial service sector. Financial services have outperformed all other sectors so far this year. “

In North America, the focus will shift to BOC which holds its interest rate decision today. No change is expected today but traders will be on the lookout for any language that could hint at a move in October. After four increases since last year, the BOC is likely to pause but reaffirm its commitment to normalization as the economy continues to expand at surprisingly robust rate. The key unknown is the state of NAFTA negotiations which resume today and could scuttle any well-laid plans by the BOC if they end in no agreement. Canada is holding firm to Article 19 provision which would allow for an independent body to resolve disputes. From the US side, any failure to reach a deal with Canada would endanger the agreement with Mexico as Congress is unlikely to approve a bilateral deal. USDCAD remains near the 1.3100 mark as concerns remain that the deal could slip through the cracks, but both parties are motivated to accomplish an agreement, so any positive news could quickly send the pair below 1.3000 as the day proceeds.

Boris Schlossberg
Managing Director

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