Mood sours in Asia, dollar remains firm

The market is always looking for a proximate cause for a change in sentiment like we saw overnight, and the most obvious candidate this time around is the story that the US envoy to Canada told the Globe and Mail that the US will seek extradition of Huawei’s CFO, held by Canada for possible extradition to the US on accusations of violating US sanctions against Iran. There is a deadline for the US to request that extradition by Jan 30, according to sources.

Obviously, an actual extradition could risk souring relations between the US and China and add risks that the trade deal talks fail. As well, we have a clear sense that economic activity in China has slowed abruptly and the sense of urgency from the political top suggests that the weakness may be greater than some of the official numbers are showing. Yesterday, Chinese leader Xi Jinping gave a speech at a high profile “study session” of senior officials across the country in which he warned on the risk of turbulence and disruption ahead.

The Brexit situation is as muddy as ever, as UK prime minister Theresa May insists that she can revisit the existing deal with EU counterparts in an attempt to resolve the Irish backstop issue seen as key for unlocking sufficient votes to pass the deal. That effort looks guaranteed to fail. She also touted her willingness to continue with cross-party talks, but Labour’s Corbyn is not playing ball, perhaps sensing opportunity over the horizon in a delay to Article 50 and eventual elections or a second referendum.

May came out speaking against a delay to Article 50, but was forced to back away from declaring full support for no delay if no agreement could be reached. Parliament will vote on whether to approve her approach in a week on January 29 and a failure to approve could mean that the Parliament takes increasing control of the Brexit process, even asking for an extension of Article 50 to avoid a no-deal Brexit if none is in place by late February.

We may even get a vote on whether to pursue a second referendum at next week’s meeting – though the popular appetite doesn’t appear to be there for another vote.

Sterling may edge back higher the more headlines point toward a delay of Article 50, but how does this bring us closer to a UK economy-friendly outcome? Still struggling to see where this goes and risks abound.

Chart: AUDUSD

AUD sentiment is suffering under the weight of mounting concerns over US-China relations. AUDUSD also failed to participate in the recent extension higher in risk sentiment, suggesting weak underlying sentiment that could at the margin point to concerns on the domestic credit crunch. For now, the 21-day SMA has been a solid short-term trend indicator and is threatened here, though the clear pivot level is the 0.7000 area that was rejected when JPY crosses recovered from their flash crash and China further strengthening its currency around the same time.