Seeking Shelter

Safe-haven currencies find demand as escalating trade tensions and tariff increases kickstart a flight to safety ahead of today's busy calendar.

Previous Day's Market Highlights

Risk appetite and demand for safe-haven currencies were the order of the day on Thursday, with both the yen and Swiss franc gaining ground as markets became increasingly jittery over escalating US-China trade tensions. Talks between the two nations in Washington DC yielded little, with no breakthrough made, and reports in Chinese media that the chances of a deal being agreed between both parties this week were slim to none. With no deal in place, President Trump followed through on his threat to increase tariffs, with a duty of 25% now imposed on almost half of Chinese imports to the US. Over the course of the day, typical safe-haven flows were in evidence, with the yen and franc both gaining more than 0.5% with Treasury yields also rising. Yields on benchmark 10-year notes neared a 5-week low amid increasing demand as part of a flight to safety, with yields moving inversely to price. The question for markets now is whether an escalation in tariffs is a pressure tactic to force a deal over the line, or the final nail in the coffin of a US-China trade agreement - with Chinese retaliation on the horizon the latter outcome appears to be a more likely scenario. 
Elsewhere, economic data from the US largely missed expectations, casting a cloud over an already softer dollar, with the greenback failing to benefit from haven demand. Producer price index (PPI) data showed prices increasing at a below-forecast 2.2% in April, unchanged from the previous release, while Core PPI figures also missed expectations, increasing at 2.4% on a year-on-year basis. With PPI being a useful leading indicator for the more widely referenced CPI figure, sluggish producer price inflation may preempt a benign CPI figure, thus increasing bets on the Fed cutting rates this year and possibly weakening the dollar. Other economic data was also relatively downbeat, with weekly jobless claims remaining close to a 3-month high and the trade deficit widening to $50bln.

Back in Europe, the pound meandered once again, with a lack of Brexit-related news to inspire market volatility. Sterling took advantage of a weaker dollar to record its 1st daily gain in 4, adding around 0.2%. In contrast, against the euro, sterling declined as the euro strengthened, with the pound losing 0.2% over the course of the day. The single currency gained ground across the board over the course of the day, adding 0.3% against the dollar, once again breaking out of its year-to-date downtrend. 
In other markets, major indices on both sides of the Atlantic lost ground, as concerns over an escalating US-China trade conflict weighed. In Europe, the pan-continental Stoxx 600 fell 1.7%, while London’s FTSE100 slipped more than 1%. US markets also declined, with the benchmark S&P 500 losing 0.5%, the 4th consecutive daily decline. Finally, oil prices were also pressured by increasing trade concerns, with both Brent and WTI losing more than 1%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1585 1.1776 1.1512 2.24%
GBP/USD 1.2990 1.3176 1.2866 2.35%
EUR/USD 1.1220 1.1323 1.1110 1.88%
GBP/AUD 1.8585 1.8882 1.8093 4.18%
GBP/NZD 1.9725 2.0021 1.9242 3.89%
GBP/CAD 1.7505 1.7728 1.7300 2.41%

Today's Market Highlights

The week concludes with a relatively busy economic calendar, with key releases due from the UK, US and Canada - though focus is likely to remain squarely on continuing US-China trade talks, with markets likely to remain tentative until fresh developments come to light.

From the UK, markets are likely to focus on this morning’s preliminary estimate of 1st quarter GDP growth. Expectations are for the economy to have grown at 1.8% on a year-on-year basis in the first three months of the year, a pace that would be the fastest since the third quarter of 2017. Attention will also be on quarter-on-quarter growth, with the UK economy set to have expanded at 0.5% on this basis. The bumper economic growth is set to have been boosted by high levels of pre-Brexit stockpiling, a point emphasised by March’s PMI surveys showing a G7 record-high level of stockpiling in the run up to a potential no deal Brexit. Despite the increase in stockpiling, business investment remains subdued due to the uncertain economic outlook, a factor which is likely to weigh on GDP throughout the remainder of the year. Markets will also pay some attention to industrial and manufacturing production figures this morning, with both set to show relatively solid increases on a year-on-year basis. 

Meanwhile, from the US, CPI inflation figures will be eyed, with the data having taken on extra significance after benign inflation was described as “transitory” by Fed Chair Powell at last week’s policy announcement. Markets expect headline CPI to have picked up to 2.1% on a year-on-year basis last month, modestly above the Fed’s 2% target and a level which would represent the fastest pace of inflation since November last year. The less-volatile core figure, which removes volatile food and energy prices, is also expected to have increased at 2.1%. The dollar will be particularly susceptible to a below-forecast release, with a continuation of the benign inflation trend likely to restart talk of a Fed rate cut. Fed speakers will also be in focus, with Brainard, Bostic and Williams due to speak throughout the afternoon. Any comments relating to the inflation release, in addition to those referencing the policy outlook, are likely to be of interest to investors. 

Friday’s final impactful data point comes from Canada, in the shape of labour market data for April, with the labour market remaining one of the few bright spots in a sluggish Canadian economy. Expectations are for employment to have increased by a net 15,000 last month, though the unemployment rate is set to hold steady at 5.8% - indicating the labour market retains some slack. Earnings data will also be eyed for a potential follow-through impact on inflation figures, though wage increases are set to remain unchanged at 2.3% on a year-on-year basis. Overall, the report is unlikely to change the Bank of Canada’s policy outlook - with the BoC on hold for the foreseeable - though markets will look for the labour market to remain resilient. Risks for the loonie appear biased to the downside, with a disappointing set of data likely to exert downward pressure. 

Finally, looking ahead to next week, the data calendar is once again sparsely populated. Of most interest are likely to be labour market reports from the UK and Australia, with the latter being of particular interest due to the RBA’s focus on labour market data for determining their next policy move. Other notable events include inflation data from Canada, retail sales from the US as well as next Saturday's Federal Elections in Australia.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP GDP (Prelim. Q1 - y/y) 1.8% 1.4%
9:30am GBP GDP (Prelim. Q1 - q/q) 0.5% 0.2%
9:30am GBP GDP (m/m - Mar) 0.0% 0.2%
1:30pm CAD Employment Change (Apr) 15.0k -7.2k
1:30pm CAD Unemployment Rate (Apr) 5.8% 5.8%
1:30pm USD CPI (y/y - Apr) 2.1% 1.9%
1:30pm USD Core CPI (y/y - Apr) 2.1% 2.0%