Rates as of 05:30 GMT

• Sell EUR/USD as the economic data for US may be good today, whereas there are still concerns about Italy and the EU Parliamentary election
• Sell USD/CAD in expectation of a good figure for Canadian manufacturing sales
• Remain short GBP There’s likely to be a rebound tomorrow as people close their positions ahead of the weekend, but it can still fall a bit further today


Market Recap

Sterling continues to plummet. The polls for next week’s EU Parliament election show the Brexit party far ahead. Meanwhile, PM May has decided to bring her failed Brexit deal back to Parliament for yet another vote during the week of June 3rd. If at first you don’t succeed, try, try, try again, apparently. This would be the fourth vote. But Labour has said it won’t support the bill, so it’s pretty much hopeless yet again. The next step seems to be May is ousted and replaced by someone even more hard-core Leave. The odds of the UK crashing out without an agreement are rising, IMHO. GBP negative

CAD on the other hand was the best performing currency, albeit not by that much. US Trade Representative Lighthizer is meeting today with Canada’s Minister of Foreign Affairs, Chrystia Freeland. CNBC reported that Lighthizer will make a proposal about removing the US tariffs on steel and aluminum, which Canada and Mexico have said is necessary to move forward on US-Mexico-Canada Agreement (USMCA), the rebranded NAFTA. (MXN was also the best-performing EM currency overnight.) Also, higher oil prices helped. So my “sell CAD” idea yesterday turned out OK even though the reason I expected the currency to perform well – stable inflation – turned out to be wrong. In fact, two of the three core inflation measures actually showed slightly slower inflation, by 10 bps. I think CAD could continue to perform well if today’s Canadian manufacturing sales come in as expected (see below).

EUR/USD was barely changed, which is interesting because there was some good news for Europe but bad news for the US. The US administration has until Saturday to decide whether to slap tariffs on auto imports, which would hurt European and Japanese auto makers. Europe has already said it would retaliate with its own tariffs. Apparently, the administration has decided to delay imposing the tariffs for another six months so that it can avoid starting a new trade war while trying to end the one with China. That’s good news for Europe and also for auto stocks, which were big gainers.

Meanwhile, US retail sales were disappointing – the headline figure was -0.2%, instead of +0.2% as expected. As a result, the Atlanta Fed lowered its GDPNow estimate for Q2 GDP by -0.5 ppt to 1.1%. That’s USD negative. But no one seems to care very much.

That may reflect underlying fears about Europe no matter what. Ten-year Bund yields hit -0.13% yesterday, the lowest since 2016. All other European bond yields declined too except for Italy, where yields rose. So there seems to be a bit of a “risk off” sentiment in Europe still, caused probably by concerns over Italy plus worries about the results of the upcoming European Parliament election.


Today’s market

No major indicators out during the European morning.

Canadian manufacturing sales are expected to be up notably, helped by a recovery in auto production and oil output, as well as higher factory prices. The figure – well above trend – should reassure the Bank of Canada that it’s correct to expect “growth to pick up, starting in the second quarter of this year” and that “(c)onsumption will be underpinned by strong growth in employment income.” CAD-positive

US housing starts are forecast to be up substantially, while building permits are forecast to be more or less unchanged. I wonder if there’s anything to these forecasts, though. The forecast for starts is basically assuming just mean reversion – it’s almost exactly the average of the very high January reading and the very low March reading (which is 1219). Mean reversion makes as much sense as anything else though. The rebound is in line with yesterday’s National Association of Home Builders (NAHB) market index, which rose more than expected to 66 from 63 (64 expected). It suggests that housing will continue to contribute to growth this year, which is positive for the dollar.

The Philadelphia Fed survey is expected to be up slightly. Yesterday’s Empire State manufacturing survey however beat expectations by a lot – up to 17.8 from 10.1, whereas it was expected to fall to 8.0. That may raise expectations for today’s survey, but in fact the two only move in the same direction 45% of the time (since Jan. 2008); in other words, pretty much a coin toss. Nonetheless if the Philly Fed survey is indeed up too, that would increase confidence in the US economy. USD positive


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Marshall Gittler

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