Good morning,

USD: Going, going, Cohn

Dollar is back to being the focal point of global investor sentiment this morning following a possible piece of good news and a definite piece of bad news. Dollar initially surged following reports that North Korea were open to denuclearisation and peace talks with the South as long as they were able to guarantee their security. This is the most open language we have heard from the regime in years and prompted a strong run higher for local assets and the USD.

Unfortunately that exuberance was reversed by the end of the day by the announcement that Chief Economic Advisor to President Trump Gary Cohn was to resign in opposition to the Administration’s plans for tariffs on steel and aluminium. He has been seen as the main opposition to tariffs from within the administration but Trump’s announcement during a joint press conference with the Swedish Prime Minister that “tariffs are coming” leaves little standing in the way of the protectionists.

The market reaction could be extended by the appointment of a protectionist in Mr Cohn’s stead with an announcement expected by the end of the week. Additional tariffs on Chinese investments are being widely trailed this morning as well with these moves seen as a retaliation against intellectual property theft.

We have said many a time this year and last that the USD is difficult to trust with Trump in the White House and the past 24hrs is a great case in point.

With all this going on we expect markets will largely forget about the Unit Labour Costs announcement at 13.30 which may be able to further the argument as to how much wages are boosting the current US inflation picture.

GBP: Spreadsheet Phil to get little

Sterling has done little in the past few sessions and is once again back to being at the behest of the Brexit back and forth. Chancellor Phillip Hammond will make a pitch this morning to include the UK’s financial services sector in any forthcoming trade deal.

It is good to be reminded however that while the EU does not need a trade deal in financial services to retain its access to the City of London, the UK needs a trade deal to prevent businesses relocating offices and activity into the EU. It will not be a coincidence that Euroclear, the settlement company at the heart of a huge amount of bond, equity and fund transactions, is moving to Brussels from London.

French Economy Minister Bruno Le Maire told the BBC yesterday that all the U.K. can hope for is “equivalence,” a system the UK and its banking industry reject as inherently unstable given the fact that its regulations can be withdrawn at very short notice.

GBP will play second fiddle to the US dollar today.

CAD: Battling the tariffs

Today’s Bank of Canada [meeting?] could be the first opportunity that a central bank has had to respond to the latest round of tough trade talk from the US – and worth remembering that Canadian economy is the US’s largest trade partner. We have been expecting dovishness from the Canadian central bank in 2018.

Higher inflation is not out of the realms of possibility of course but we think that within a backdrop of slowing growth – as the tailwind from the stimulus plans starts to fade – that this is unlikely. Stronger growth across the border in the United States could drive higher inflation as could stronger spending by Canadian households. On the latter point, consumer credit levels and household indebtedness may impinge the ability of the man/woman in the street to keep spending.

We look for the CAD to weaken further this afternoon.