The big story yesterday was GBP, which fell sharply after the EU published its draft version of the Brexit treaty. There are two key points in the document: One, that the UK will have to follow EU law during the transition period or it won’t be guaranteed full access to the single market. Britain on the other hand wants to be able to choose which EU rules the country will follow during the transition period. Two, the problem of what to do with Northern Ireland remains unsolved. The EU says that if the agreement with the UK isn’t enough to avoid a border between the Republic of Ireland and Northern Ireland, then Northern Ireland should remain aligned with the EU and there should be in effect a border between Northern Ireland and the rest of Britain. That idea of course is a non-starter for Prime Minister (PM) Theresa May, for the Northern Irish party that supplies her majority in Parliament, and indeed many other Britons on both sides of the aisle.
Furthermore, enough Conservative Party members have now backed an amendment calling for the UK to participate in such a customs union with the EU that they could join together with the Labour Party, which supports such a move, and bring down PM May’s government
As for USD, it’s noticeable that it increased even though US interest rates retreated somewhat yesterday, US Q4 Gross Domestic Product (GDP) was revised down slightly, and US pending home sales collapsed to the lowest level since 2014, adding to the gloom in the housing market. The recent terrible housing data plus flat US auto sales suggests that the US economy is sensitive to higher interest rates.
It was also noticeable that the only major currency to increase vs USD was JPY. That’s because of risk aversion driving Japanese investors to hedge their overseas assets, which draws in other market participants to hedge as the end of the fiscal year (31 March 2018) draws near with USD/JPY below the crucial ¥107 line.
The risk aversion picture was somewhat mixed overnight. While Wednesday’s 28th February, 2018 official manufacturing Purchasing Managers Index (PMI) for China fell far more than expected, today’s Caixin manufacturing PMI unexpectedly rose (51.6 vs 51.3 expected, 51.5 previous). The commodity currencies AUD and CAD were weaker nonetheless, suggesting that it was overall USD strength moving the market.
Today Thursday 01 March, 2018 the Markit manufacturing purchasing manufacturers’ indices (PMIs), including the final versions for the major industrial countries that release a preliminary version, as well as the closely watched Institute of Supply Management PMI for the US. For the EU and US, the forecast for the final figure is always just the preliminary version.
The UK manufacturing PMI is expected to show a small decline, meaning a deceleration in the pace of expansion – but still an expanding economy. The forecast level of 55.0 is still quite healthy.
UK mortgage approvals are expected to be up 1.6%. This compares with the sharp 11.2% jump in Monday’s 26th February, 2018 UK Finance figure. The two do not necessarily move together every month. Nonetheless, confirmation of an upward trend in UK housing demand could prove temporarily beneficial for GBP, although the dueling visions of post-Brexit relations between the UK and EU will be more important.
US personal income and personal spending are important indicators for the stock markets, but they don’t tend to have much impact on the FX market. If they do this time, it’s likely to be negative.
More important for the FX market are the personal consumption expenditure (PCE) deflators that come out at the same time. That’s because interest rates are the focus for FX, and the Federal Reserve System (Fed) sets interest rates according to inflation, not income or spending. Within these figures, the core PCE deflator is naturally the one the markets focus on the most, because that’s the Fed’s primary inflation target. In any event, the yoy rate of change of both is expected to be unchanged from the previous month.
The US Institute of Supply Management ISM index is expected to decline slightly, as is the prices paid index, a closely watched harbinger of inflation. Over the last 20 years, the average ISM PMI has been 52.4, with a one standard-deviation range of ±4.8. That means last month’s 59.1 was 1.4 standard deviations above the 20-year average. A slight slow-down from these lofty levels still indicates a healthy pace of expansion. USD-positive.