FX Update: Trump touts trade deal, Tories sweep to massive majority

The UK election results was beyond even most of the more optimistic projections for the Conservatives, who now have a strong mandate to deliver Brexit and to negotiate on behalf of the UK next year on the eventual trade deal.  As I wrote in a recent piece, some key issues remain here for sterling that could keep the ceiling rather low after the currency has reacted so far right in line with my rough guesstimate yesterday (1.3500 for GBPUSD and 0.8250 for EURGBP).

US President Trump claimed a phase one trade deal has been agreed in principle with China, which stoked risk sentiment quite sharply yesterday. The chief development here is the immediate removal of the December 15 tariffs, which would have inflicted widespread damage. Supposedly, other tariffs already implemented will also be reduced. We have a few problems with the rest of the situation. Chief among them is that so far, the Chinese side has maintained radio silence on this deal and some suggest that China would like to keep the terms of the deal out of the public eye, although at least one source claims that a Chinese envoy will sign the deal today. Regardless, the $50 billion agreed is a large target if it is annual and only centered on agricultural goods and commodities, as the country’s largest recent commodity purchase total from the US was the $20 billion in 2017. There may be other promises that are beyond what is signed, if anything, in the official deal. Whatever happens, this is likely “peak deal” for the cycle and the question is how much of a further market rally this deal can sustain.

Late yesterday, the New York Fed quietly rolled out a massive addition of $365 billion in various repos to provide liquidity over year-end, not even bothering to place the announcement in the press releases on its home page. This apparently puts to rest the risk of liquidity issues over year-end that were brought to light by the widely discussed Zoltan Pozsar piece, though some would point out that in that piece, his claim was that “real QE”- or buying of coupon treasuries as opposed to T-bills – would be required. In any case, we only have a handful of trading days left for the year and not a jot of concern on any notable risk metric, so time is running out for this concern to rear its head.

Today we are watching the US Retail Sales data for November with interest and yesterday’s weekly US initial jobless claims number set off an alarm bell we though had been recently extinguished – at 252k this was the worst claims number since hurricane-influenced numbers in September 2017. How this data series and the payrolls numbers shape up after the important holiday shopping season will be crucial for whether the US labor market and economy are deteriorating early next year – an outcome this market is in no way priced for.

Chart: GBPUSD
GBPUSD leapt to the 1.3500 area in response to the clearcut Tory majority and sense that the lay of the post-Brexit landscape is beginning to finally clear up, even if uncertainties on the shape of a final trade deal remain. Our guess is that a trade deal on goods won’t be much of a problem, but the tricky bit will be the UK trying to leverage its financial services industry in any meaningful way, which may prove more of a challenge as it will likely have to remain in the EU regulatory orbit for a frictionless trade deal to be accomplished. In any case – this initial reaction round level of 1.3500 is the key first hurdle here, with the USD outlook the other side of the equation as a weaker USD may be needed as much as a stronger sterling to drive further upside. We’re neutral on sterling here and suspect sideways action for some time in broader sterling levels. Any failure below back below the 1.3200 area achieved ahead of the UK election would represent a significant setback for sterling bulls here.