USD edges lower, sterling eyes Brexit summit

Another day of local new highs for the equity market and extremely low volatility in FX, though with a detectable and broad weakening of the US dollar, a weakening now of sufficient degree to potentially register minor breakouts in AUDUSD and USDCAD if the action persists.

The narrative has switched to optimism on global growth in the absence of policy tightening – i.e., that  the Fed will be happy to remain “patient” and not indicate any intent to hike rates if the outlook remains positive and even if inflation picks up again, given the discussion of a “symmetric” inflation targeting (allowing inflation to run hot for a time to compensate ).

To really encourage this narrative, as discussed yesterday, we need to see the long end  of the US yield curve pulling back higher without risk sentiment running for cover at the implications – so the 2.50-2.60% zone in the US 10-year  benchmark is our pivot  zone for judging whether this theme could have legs and drive a notable extension of the risk sentiment rally, leading to further commodity dollar, Scandie and EM strength.

An important day ahead for the Brexit outcome as the crunch summit could see the announcement of a long extension of the Article 50 deadline by nine or even twelve months. Theresa May wants a June 30 extension, but the UK parliament can overrule her today. Then tomorrow we have to consider what concession the EU side extracts for granting the delay.

A second referendum? That’s a risky gambit, but punting the responsibility back to the people may prove the only possible course through the political logjam. Even assuming we avoid all cliff edge scenarios, will parliament feel it has the authority to assume that the people’s vote means it can cancel Brexit or agree to a soft Brexit with the UK permanently locked into the EU customs union?

Trading interest

Long AUDNZD on dips for 1.0700+, stops below 1.0450
Watching for how the US dollar trades after tomorrow’s key event risks for positioning bias

Chart: AUDUSD

AUDUSD up having a look at a new 20+ day high close today, driven by support from key commodities like iron ore and even gold (recent record posted in AUD terms) and hopes that the global growth outlook is turning more positive again. The chief factor holding the Aussie back is the concern on the domestic housing front, where housing prices and construction activity have been in a freefall in recent months.

Looking higher, there is considerable work to do for the bulls to argue that an uptrend is forming – a solid close above the  200-day moving average and eventual follow through above 0.7350-0.7400 look awfully far away when we’ve been trading in a highly constricted trading range for the last 6-7 months and still await a US-China trade deal, which is still some weeks away according to the latest management of expectations late last week.