British pound sinks as end nears for May; Nothing new from FOMC Minutes

The British pound is the worst performing currency, down for a 13^th consecutive day as traders prepare for a hardliner to take over Brexit negotiations.  PM May is under intense pressure to resign and she will meet with Graham Brady, chairman of the 1922 committee of backbench MPs, on Friday.  Theresa May may not make it to June and sterling is tanking as Boris Johnson, former foreign secretary is the front-runner to replace her, which would mean we could see the hardest Brexit.  After PM May provides her notice, we will see many people from the Parliamentary conservative party express their interest in becoming May’s successor.  Then we will see a series of votes until we see two candidates, and then we will see a wider vote with the entire conservative party.  The new leader of the conservative party will also take over as PM.

Minutes – Fed to remain patient on rates for some time

Mnuchin – Trump and Xi will meet at G20 summit

CAD – Retail sales deliver biggest gain in 10 months

Oil – Consecutive builds drive down crude prices

Gold – Continues to sink as ETF holdings rise

Minutes

The FOMC minutes did little to provide insight on what will be the next move.  The Fed is set with being patient for some time.  Officials are convinced the downdraft with inflation was transitory, disappointing investors with rate cut bets.  Inflationary pressures are not coming from the strong labor market and it appears we should not look forward to seeing the 2% target reached anytime soon.  The Fed discussed the pros and cons of shortening bond portfolio maturity.  FOMC watchers might as well go on holiday as the next couple months of data will yield little Fed reaction.

The dollar was little changed, stocks had limited downside and the 10-year Treasury yield stayed near the session lows of 2.382%.

Mnuchin

Treasury Secretary Mnuchin congressional testimony provided a plethora of headlines that provided no new insight on the next steps on trade front.  He noted Trump and Xi will likely see each other at the end of June.  Mnuchin said the Trump administration is watching how the tariffs on Chinese goods will affect prices on the shelves for the American consumer.  A breakthrough is expected on the trade front even though both sides are not sending any optimistic signals.  Markets are already focused on the 2020 election and if we see talks stall well beyond the summer, President Trump’s election chances will drop sharply as irreparable damage to sentiment would be done to the US economy.

CAD

The Canadian dollar had a good start to the trading day after a retail rebound led to a one-month against the greenback.  The loonie rally however was short-lived after the EIA crude inventory showed a surprise build, which sank oil prices, which is Canada’s largest export.

The outlook for the Canadian currency remains muddy as uncertainty persists with the North American trade deal and oil prices may be in the middle of a decent pullback.  Many economists are choosing to focus on the improving economic data could lead to further tightening by the Bank of Canada in 2020.

Oil

Crude prices plummeted after the EIA inventory data showed two consecutive weeks of multi-million-barrel builds.  Rising inventories and a slowdown with refined product demand could suggest we could see further pressure as we approached the long weekend.  The nationwide rise of 4.74 million barrels of crude was twice as much as the API report from the day before.  Additional bearish signals were steep dropoff with exports and the drop in refinery utilization, which was the lowest seasonal drop in 5 years.

West Texas Intermediate crudes 2.9% decline exceeded Brent’s fall of 1.81%.  The WTI/Brent spread is likely to widen in the short-term as the US oil supply glut will weigh on WTI and geopolitical tensions should keep Brent supported.

Gold

Gold prices could be on the verge of seeing a major move lower as hedge funds and ETF investors are turning net long with gold, while price action continues to sag.  The recent trend over the past couple of years has been for non-commercial trade flows to coincide with the direction of the yellow metal, but when it doesn’t, typically we see gold prices set the direction.  If the smart money is wrong, we could see gold fall to 5-month lows on a break of the $1,265 level.

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