Analysts at CIBC, point out the odds of a no deal Brexit have risen sharply, but implied volatility in GBP/USD hasn’t yet.

Key Quotes:

“Since PM May announced she was stepping aside and Boris Johnson was placed by pollsters as the favourite to take over, sterling has fallen versus the US$ and euro. But perhaps it could and should have performed worse. Odds for a hard Brexit have doubled since the start of the month. Yet, while implied volatility for six months’ time (covering the Brexit deadline) has risen more than that for three months’ time, both remain well below levels reached toward the end of last year and into the start of this year.”

“Perhaps it would still be wise to take out protection against further volatility, and expect further near-term weakness in sterling.”

Analysts at National Bank of Canada show the most relevant economic indicators to be released in the US next week, among them, the official employment report.

Key Quotes:

“The most important piece of news will be May’s non-farm payrolls. Jobless claims continued to hover near a 50- year trough in the month, pointing to a very low rate of layoffs. Hiring, on the other hand, may have eased from the prior month’s healthy pace judging from Markit’s flash composite PMI report which showed private sector employment advancing at the weakest pace in just over two years. Accordingly, we’re calling for a deceleration in employment creation, with just a +175K print. The unemployment rate, for its part, may stay put at 3.6% if, as we believe, the household survey shows a modest increase in employment.

“Still in May, the ISM manufacturing index could have decreased slightly, in synch with a declining Markit manufacturing PMI during the month. Several indicators for April will also be released this week including wholesale sales, consumer credit, construction spending and the trade balance.”

“A few Fed officials are scheduled to give speeches, notably Jerome Powell (Tuesday), Thomas Barkin (Monday), James Bullard (Monday), Richard Clarida (Wednesday) and John Williams (Thursday). Finally, the most recent iteration of the Fed’s Beige Book will come out on Wednesday.”

  • Until yesterday, the MXN was among the top performer YTD.
  • Trump’s announcement of tariffs to Mexican imports changed everything.
  • USD/MXN is having the biggest weekly gain since October.

The USD/MXN pair collapsed as the Mexican peso had the worst day and week since October affected by US President Trump announcement of a 5% tariff on Mexican imports starting June 10 and rising to 25% by October 1 if Mexico doesn’t take action to stop the flow of migrants across the border.

The surprise nature of this announcement, and record long positioning in the peso, has pushed the largest single session depreciation in MXN since October of 2018, pressuring medium and longer-term yields higher due to risk premium and implications for Banxico”, explained TDS analysts. They expect this matter to be resolved quickly, and likely avoid the imposition of tariffs.

They add project the MXN will eventually recover and trade back towards levels that persisted before the announcement, “though the broad implication of the use of tariffs to achieve political goals may have wider-ranging market impact and hurt risk sentiment.

From near 19.00, to look toward 20.00

In a few hours, the USD/MXN rose from near 19.00 to 19.82. It then retreated and near the end of the week stabilized around 19.65, to post the highest weekly close since December. Until yesterday, the Mexican peso was the top performer of the year-to-date but that changed with the 3% decline versus the US Dollar today.

The negative tone around Mexican assets could continue and particularly if negotiations next week in Washington show no progress that could lead also to the breakout of the new trade deal (Mexico-Canada-US Agreement). Risk aversion could also weigh on the MXN. If the pair rises further the next barrier is seen at 20.00 and above at 20.20/25 there is a long-term downtrend line.

  • Baker Hughes rig count rises to 800.
  • Heightened geopolitical tensions continue to weigh on commodities.
  • WTI drops nearly 15% in last two weeks.

Crude oil prices remained under pressure on Friday and the barrel of West Texas Intermediate, which lost more than 4% on Thursday, touched its lowest level since mid-February at $53.98. As of writing, WTI was down 4.15% on a daily basis at $54.05.

Concerns over the potential negative impact of a prolonged trade conflict between the U.S. and China on the global economy and the oil demand outlook continue to weigh on commodities. Earlier in the day, the data published in China showed that the manufacturing sector expanded at a slower pace than expected in May and the business activity in the service sector contracted in the same period.

Furthermore, reports of China's Commerce Ministry preparing a list of "unreliable entities" list to combat foreign firms that cut supplies to China hinted at further escalation of the trade war down the road. Additionally, President Trump vowed to impose tariffs on all Mexican imports to trigger a fresh wave of flight-to-safety on Friday.

Meanwhile, the weekly report published by the Baker Hughes Energy Services revealed that the number of active oil rigs in the U.S. rose to 800 from 797 last week to point to higher production in the U.S.

Today's report on consumer confidence from the University of Michigan’s, showed the index sentiment at 100.0 in May, a bit softer than the preliminary read and the text accompanying the release offered cause for concern about tariffs, explained analysts at Wells Fargo.

Key Quotes:

“The headline print was actually a bit better than the number for April, but the accompanying text referenced a significant erosion in consumer confidence in the last two weeks of May and 35% of respondents “spontaneously mentioned” tariffs.”

“Consumer sentiment is now roughly back to where it had been in September before confidence began a trend decline amid the government shutdown and a wobbly stock market.”

“Despite the trade anxiety, the expectations component rose to 93.5 and while that is down from the initial estimate, it still marks the highest level in 15 years.”

EUR/GBP daily

EUR/GBP broke to a 4.5-month high at 0.8875 but is retracing most of the gains made earlier in the day.

EUR/GBP 4-hour chart

EUR/GBP is trading in a bullish channel above its main SMAs suggesting a bullish bias in the medium term.

EUR/GBP 30-minute chart

Bulls should keep the market above 0.8842 and then break above 0.8875 in order to keep the bull trend intact. On the flip side, a break below 0.8820 can lead to a drop to 0.8780.

Additional key levels

Analysts at the National Bank of Canada explained that a further deterioration of the global economy, and corresponding oil price slump, represent the biggest downside risk for the loonie. But if, as they expect, policymakers in the US and China realize the cost of their dangerous policies and step back from the brink, investor sentiment about global growth will improve and may then be able to focus on positive developments in Canada.

Key Quotes:

“The Canadian economy is on the mend as evidenced by the strong handoff from March which signals an acceleration of growth in Q2. That, coupled with the removal of tariffs by the U.S. on steel and aluminum imports from Canada, should have given a lift to the Canadian dollar which instead continues to struggle amid investor concerns about global growth.

“Canadian exporters also stand to benefit from stronger U.S. imports in the second quarter after the Q1 purge stateside. If, as we expect, Q2 growth ends up being better than the 1.3% print the Bank of Canada is currently estimating, that would likely get markets to reduce any remaining expectations of rate cuts this year, boosting the Canadian dollar in the process.”

“While we’ve left unchanged our end-of-year target of 1.30 for USDCAD, expecting a U.S.-China trade deal to breathe new life into oil prices and hence the Canadian currency, we may have to revise that forecast if June’s G-20 meeting fails to alter the current toxic tone in trade negotiations between the U.S. and its trade partners.”

"The May official non-manufacturing PMI held at 54.3, but the manufacturing PMI disappointed, coming in 0.5 points below expected at 49.4," note TD Securities analysts.

Key quotes

"Very unconstructive was the retrenchment in import and export demand sub-indices, suggesting sharp weakening in both external and internal conditions. While external weakness is correlated with the global cycle, it now stands to be further exacerbated by the sharp deterioration in U.S. trade relations."

"Our greater concern however is the domestic weakness indicated by the import sub-index. When taken within the context of a drop in overall new orders following the Q1 credit surge, this data is highly suggestive that the seasonal boost from credit stimulus has had little self-sustaining momentum behind it, at least relative to other drag factors."

"Making this very obvious is the sharp retrenchment in the small and medium-sized enterprise PMIs. These sectors are highly sensitive to targeted stimulus and economic conditions, more so than the SOE sector, suggesting fundamental weakness persists. Thus we expect further targeted stimulus to continue, and see fundamental pressure on CNY to 7.20, along with pressure on Asian FX (in particular SGD and TWD)."

Italian Deputy Prime Minister Luigi Di Maio crossed the wires in the last hour saying that the 5-Star wasn't consulted over the letter that was prepared as a response to the EU's concerns over the budget and called upon a government meeting before it is sent out, as reported by Reuters.