Global Themes

The FX market was choppy and twitchy ahead of America’s long holiday weekend. The U.S. dollar was mostly flat as big losses against the yen were counterbalanced by renewed strength against the U.K. pound. Sterling plunged to three-week lows, getting whacked by a poll showing an evaporating lead for Prime Minister Theresa May ahead of the national vote in less than two weeks on June 8. The original thinking when Mrs. May announced the snap election in April was that she could win a supermajority in Parliament, giving her a strong mandate to call the shots with respect to Brexit negotiations with the EU. With the prime minister’s once double-digit lead now down to a mere 5 percentage points, according to the latest opinion polls, markets are now pricing in alternative outcomes such as a smaller than expected win for Mrs. May or perhaps no victory at all. Heightened political uncertainty in the U.K. should keep the pound on volatile ground in the run-up to the election.

GBP

Round up the buyers of the U.K. pound. They’re enjoying a holiday sale as the pound plunged about a percent to April lows. Sterling was already on slippery ground after data this week showed the U.K. economy was weaker than previously thought. The pound’s retreat from eight-month highs above $1.30 last week gathered steam after the U.K. political campaigns resumed after a pause in the wake of the terrible attacks in Manchester and a poll showed a dwindling lead for front runner Theresa May. The chance of Mrs. May riding the election to a supermajority in Parliament receded in a material way as a poll showed her lead had evaporated to a mere 5 percentage points. The previous poll showed her lead halved from what was once double digits. The polls are likely to swing more ahead of the June 8 vote but ones that suggest a smaller majority win for Mrs. May or perhaps no victory at all would risk putting the pound on an unpredictable path.

USD

The dollar firmed after mostly better than expected U.S. data bolstered the case for the Fed to raise interest rates next month. U.S. growth got better with age with the second estimate showing the world’s top economy expanded at a 1.2 percent annual rate over the first quarter, better than the initial print of 0.7 percent and forecasts of just below 1 percent. The 0.7 percent drop in April durable goods was better than forecasts of a larger fall. But business spending disappointed with a zero reading for a second straight month. Nonexistent business spending in recent months will curb any enthusiasm over the first quarter’s growth upgrade.

CAD

The loonie’s topsy-turvy performance continued Friday with the Canadian currency in positive territory on the day, tracking volatile oil prices, which moved back above $49, higher. The loonie is set to finish the week ahead of the greenback after the Bank of Canada seemingly shifted its policy stance into neutral and sketched a slightly brighter outlook for the Canadian economy. Markets seem more convinced that the next move in Canadian interest rates would be higher, though not for several months yet given the uncertain outlook for cross-border trade relations.

JPY

The yen was top dog among major currencies Friday, boosted by softer global equities which boost haven assets and constructive data from Japan showing the highest inflation in two years. But the one-tick rise in core consumer inflation to 0.3 percent in April is nothing to get excited about since price growth remains a country mile below Tokyo’s 2 percent bulls-eye and isn’t likely to rise much over coming months. The yen nevertheless stands to gain from political uncertainty in the U.S. and Britain and any market preference for safety over the long U.S. holiday weekend.

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