Good morning,

GBP – Behind the scenes

A lack of economic data yesterday didn’t stop sterling sliding.

The current public progress on the Irish border has halted the negotiations and progress in Brussels, to the frustration of everyone holding both EUR and GBP. Both the DUP and May’s cabinet have raised concerns over the border and post Brexit arrangements. This has led to an increase in costs in options markets associated with hedging GBP downside.

Sterling took a leg lower yesterday following David Davis’s announcement that no impact assessments/sectoral analysis on the economics of leaving the Single Market nor the Customs Union have been done by Whitehall. While some will shriek about contempt of parliament, most will wonder what the departments in charge of Brexit have been doing since formation in the days following the referendum vote. GBP is in a trusting mood at the moment but that trust can fail at any time.

UK papers this morning are full of supposed new deadlines on when the Irish border issues must be sorted. The Guardian is reporting that Michel Barnier has 48hrs to agree on the text while EU Commission President Juncker is said to be open to keeping the deadline open until next week’s European Commission meeting.

EUR – Ups and downs

The Euro slipped for the third day against the USD as it traded softly. Constructive comments from European Central Bank Member Mersch about the need for a credible exit strategy surrounding Eurozone policy were largely overlooked with EURUSD always wanting to trade into the 1.17s.

Up today we have Eurozone GDP at 10:00 GMT and a speech from Draghi at 16:00 GMT.

CAD – Cautious and Careful

The Bank of Canada kept interest rates the same at today’s monetary policy meeting while echoing a very cautious tone. They have already hiked rates twice this year so all eyes were on a third especially as inflation has picked up. They believe the recent increase in inflation was down the ‘temporary factors’ in particular fuel prices, so it wasn’t appropriate to make any changes. The Canadian dollar weakened after this news but January’s meeting will certainly be in focus for the CAD hawks out there.

It is very possible that 2018 will be a rocky year for the Canadian dollar. 2017 has not been a cake walk with headwinds from the possible renegotiations of NAFTA, the breaking down of the correlation with oil prices and the slowing of the impact from the stimulus measures implemented by the then nascent Trudeau government.

Throw in an overheated housing market, risks to the NAFTA trade deal and overall global trade from a stumble in China and we think that investors will be very reticent to hold on to the CAD next year.

USD – Mixed Bag

A mixed day of economic data for the US as the ADP employment change number, which measures the change in the number of employed people in the US, beat expectations. However, non-farm productivity measuring the overall business health in the US with an influence on GDP, came in lower than expected which stopped any momentum during the afternoon.

Tomorrow we have further US jobs data, specifically jobless claims which shows the number of people in the US claiming state unemployment insurance. This number is a good indication of how strong the labour market is. This will be the highlight of the US data tomorrow afternoon.

Have a great day

Jeremy Cook, Chief Economist