FX Update: Trading Brexit headlines a dangerous pastime

Sterling is bid again this morning as the EU’s Barnier made a few promising noises on the feasibility of a deal, while the Dutch foreign minister weighed in on the need for the UK to “improve” its proposal. One point that could prove difficult is how a “deal in principle” between the Johnson government and the EU, which it now seems can quite quickly be made, makes its way through parliamentary approval, especially ahead of the October 31 deadline. Will Johnson agree to a delay in order for details to be hashed out, or will he try to force a No Deal if Parliament votes against his plan, while declaring the fault for the No Deal rests on their shoulders? Still too many questions for traders to draw a conclusion, but perhaps the very threat of Johnson's blame disciplining the parliamentary vote in favour? Market looks rather confident we are headed for a deal.

The market took the news remarkably well yesterday that China is not willing to sign on to the “phase one” trade deal until further talks are held. This was according to a Bloomberg article yesterday, and many noted that no Chinese press sources corroborated Trump’s declaration that this was a deal for the ages. The key sticking point, if the sources are to be believed, appears to be the mid-December US tariff schedules on remaining Chinese imports. Trump’s desperation to keep the equity market elevated and avoid further economic damage from trade policy ahead of the 2020 elections could yet see him walk back these tariffs, but others have pointed out that there could be more political traction to be found in taking a strong stance against China and blaming a portion of the economic fallout on the too-tight Powell Fed.

The Turkish lira has seen a rocky ride over the last few sessions, spiking lower on concerns that the outrage among US lawmakers at Trump’s abandonment of Kurdish forces in Syria would prompt harsh sanctions from the Trump administration. But the lira found relief as yesterday’s US sanction measures were far more modest than feared, including steel tariffs, a cessation of trade deal talks, and sanctions against individual government ministers. Going after the jugular would have been a move against Turkish banks. This morning, the lira is back on the defensive a bit as Volkswagen. All in all, Turkish assets are at extreme risk here given the dual risk of EU disengagement and even sanctions and ongoing risks that Trump is forced to extend the US sanctions due to domestic pressures.

Chart: NZDUSD
The kiwi has been under pressure to start the week as China’s import numbers released Monday suggested weak demand and on the disappointment that China is not yet ready to sign on to the phase one US-China trade deal. New Zealand releases its Q3 CPI tonight – an important test for the kiwi in terms of testing the RBNZ’s patience if we see a downside miss.  For now – the smart technical reversal after the marginal new multi-week highs on Friday is feeding the bearish case for a test of the lows here and possibly more. The lower red dotted line on the chart around 0.6235 is the low from back in 2015 - a reminder that recent lows were an attempt at taking out that major level.