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Welcome to the party Michael Barnier.

By Hamish Muress

Welcome to the party Michael Barnier. The pound has finally caught a break and surged back from its one year lows against the euro as well as rallying against the USD perhaps as thin liquidity remains in the market for one final week. Comments from Michel Barnier that the EU is willing to offer the UK an agreement unlike any other is a clear indication that the EU wants to negotiate and extend a soft Brexit. Its no secret that the pound has favoured a softer Brexit and it appears that the fresh relationship with Dominc Raab and Barnier is working well, business and negotiating is done between people and it appears they are getting on very well. Now as long as Theresa May (or Liam Fox) does not temper this excitement with talk of ‘no deals’ (or dodgy dancing) then the pound could bounce into September on the front foot.

The cards for a USD rally are on the table and it could just be a matter of time. There was further welcome news out yesterday from Canadian Prime Minister Justin Trudeau as he said that he believed an agreement for the new NAFTA could be formalised by Friday. The main risk for the market though is time. With September(!) just around the corner the US is set to impose 25% tariffs on up to $200bn worth of Chinese exports and whilst Trump has extended his hand to Canada and Mexico the recent talks with China were not as productive. The risk off trade that favoured the USD recently has slightly run its course however as we move into a new month and there is little progress on China-US trade negotiations we could see the USD strengthen once again. This is never good news for the commodity currencies (AUD, NZD) or emerging market currencies.

The EUR is managing to hold on to the gains it has made against the USD recently despite, a dip in German data yesterday. There’s a raft of EU data to finish off the week, but the big risk to the EUR at the moment and the big story is from Italy. Yesterday the Italian deputy Prime Minster denied reports that Italy had asked the ECB to help with it’s bond sales, but the constant worry about the upcoming Italian budget is the risk that it could cripple Italy. This is because in order to fund the budget Italy may have to unwind previous reforms which could hamper future Italian growth prospects (Italian growth is already dwindling). This growth needs all the help it can get because Italy contributes 12% of the EU’s total GDP (as well as 12% of its population – punching) which in turn creates concerns about about the EU’s future growth prospects. The ECB recently said that the main risk to its plans is trande tensions but we believe that Italy is more of a worry. This also isn’t an event that is going to go away anytime soon, after all we are talking about the 2019 budget.

The Aussie dollar can’t catch a break at the moment, it really can’t. The decision from one of the country’s biggest lenders Westpac, to raise the rates on its variable mortgages by 14 basis points has rattled investors (I’m also sure that it has rattled home owners). It is the housing market that is a concern here and there’s long been a suggestion that it is a bubble in Australia waiting to burst. By raising mortgage rates consumer’s disposable income which is often spent on high ticket luxury items will be cut damaging the country’s future growth prospects (there’s a theme in today’s morning report). This morning’s report on Private Capital Expenditure which came in worse than expected also caused the Aussie to tumble.

Prime Minister Justin Trudeau needs to stop following the example of Theresa May. We don’t necessarily like to make comparisons but this is a good one; yesterday Trudeau announced that an agreement with the US and Mexico over the NAFTA 2.0 deal looked likely by Friday, good news for the market and Canada. However Trudeau caveated this by saying (and here is the May comparison) that “No NAFTA deal is better than a bad NAFTA deal”. We will await for tomorrow’s news but in the meantime the market will also be watching out for the GDP release later today.

The Kiwi is also struggling with business confidence coming in worse than expected as well. We’ve talked about how New Zealand is struggling domestically with dairy prices but the main weight on today’s business confidence survey was the global trade tension. It’s not entirely clear yet what impact this trade tension has had on China, there will be an update tomorrow, but New Zealand will hope that China can bounce back with the Kiwi following.