Global Head of Macro Strategy
Summary: The mood across markets has brightened further in Europe on smooth Brexit hopes driven by the news that major London clearinghouses will retain access to the EU after December 31. This has EURGBP eyeing downside pivot levels. Elsewhere, things are looking a bit less bright as the strong US dollar weighs on sentiment for EM currencies and even among the small G10 currencies.
Sterling was already showing signs of resilience late last week, in part on lowered expectations that the BoE is looking into an imminent move to a negative rate policy (BoE’s Ramsden using those words almost exactly in the minutes after I am writing this, as he sees the effective lower bound at 0.1%), but also on a suddenly more positive tone from informal Brexit talks that were somewhat drowned out over the furor over negative policy rate considerations recently. The Brexit talks are set to get more formal this week and starting tomorrow, with this round seen as a last dash effort if any agreement is to be made on Boris Johnson’s timeline aiming for mid-October agreement. Particular focus from the EU side will apparently be on how any trade deal will be enforced after the recently passed Brexit bill could walk back key portions of the Withdrawal Agreement, which effectively stipulated a customs border across the Irish Sea (separating Northern Ireland from the rest of the UK.)
A specific headline supporting sterling this morning was the news from ESMA (Paris-based European Securities and Markets Authority) that the UK’s clearinghouses for derivatives, energy and metals trades will be able to continuing doing business with EU financial institutions after the December 31 end of the Brexit transition period. This is hugely important as the derivatives portion of the above includes things like the global settling of USD, GBP and EUR swaps.
Chart: EURGBP
EURGBP is pressing back lower toward what is arguably the downside pivot area around 0.9000, which would begin to fully reverse the early September spike inspired by Boris Johnson’s new move to get the Brexit Bill in place. Still, the action will remain highly headline dependent over the next week and more into mid-October on whether we are moving toward a deal. Positioning for a directional move in options is a way to trade outcomes for those fearing the large swings in the spot exchange rate until we either get a deal or a hard Brexit. For the former a long put spread expiring 8 Jan 21 with strikes of 0.88 and 0.86 cost about 56 pips offering almost 3 to 1 reward-to-risk. Strikes farther out of the money offer better multiples if the underlying trades down to the lower strike.
Elsewhere, the strong mood in Europe this morning is not providing notable positive contagion into emerging markets, where the USD strength is beginning to hurt. An FT article (paywall) this morning points out the scale of EM borrowing (some $100 billion since the outbreak of Covid-19) and rightly wonders at the ability for emerging markets to repay this debt. With USD liquidity growth slowing from the initial huge splash, the risk to EM is enormous if the resurgence of Covid-19 or any other threat keeps the global recovery weak or worse. US political dysfunction is another risk across markets as well, keeping new US stimulus possibly bottled up until after a new US Congress sits in January.
One EM currency that may be eyeing specific outcomes is the Russian ruble, as USDRUB accelerated higher to close last week in a move that doesn’t seem particularly driven by oil fundamentals. Ruble traders and owners of Russian assets may be eyeing the strength of Joe Biden in the US election polls, as Biden and the Democrats are seen as likely to be far less friendly to Russia than Trump on accusations of prior interference in US elections and the poisoning of Russian opposition leader Navalny. The ruble is close to its Covid-19 panic lows than most other major EM currencies, save for the Turkish lira, where even last week’s 200 basis point hike failed to stem the selling, with the lira tumbling to new cycle lows this morning.
The G-10 rundown
USD – the USD strength beginning to ease somewhat by lunchtime in Europe on very strong risk sentiment all morning long in Europe. Considerable work to be done by the USD bears to reverse the recent rally impulse.
EUR – as noted in today’s Saxo Market Call podcast, European banks are in the dumps, with the broad banking index of equities touching its lowest level since the 1980’s. Is there any EU recovery without a proper cleanup of the banking system? The mood is very positive today, but let’s see if that lasts.
JPY – the Japanese yen is hanging in better than one would expect on a day in which European equities are ripping some 2-3% higher. Part of the resilience likely down to sympathy with USD moves in the crosses and a local weakness here in the reflationary narrative (commodity prices
GBP – sterling firmer on the developments noted above and plenty more where that came from if we get clear signals that the two sides are moving toward a deal later this week as the latest Brexit talks get under way tomorrow.
CHF – the positive mood in Europe rubbing off ever so slightly on CHF, with EURCHF have a poke at 1.0800 again this morning - the bigger level there is 1.0900. The latest weekly sight deposit data showed negligible change (no real intervention ongoing last week).
AUD – the Aussie is disappointing here, suggesting that the story for the Aussie is more linked to commodity prices and the reflationary story more than risk sentiment per se, as liquid, risky assets are putting in a stellar performance today, while iron ore remains stuck near a two-month low. Still, structural weakness for AUDUSD only really arrives with a forceful move below 0.7000.
CAD – the USDCAD bounce has been gentler than the USD bounce elsewhere, with CAD showing its tendency to track USD direction in crosses like AUDCAD (big mover that one recently)
NZD – the kiwi generally following the Aussie’s lead, though in the AUDNZD cross, the kiwi extended aggressively stronger last week – the latest distraction is the 1.0750 area, the last major Fibo (61.8%) of the rally wave from July and August, though bulls there need a negative NZD catalyst and move above 1.0800-50 to rekindle their hopes.
SEK – the positive mood in Europe rubbing off more easily on SEK aftter EURSEK shot above its 200-day moving average last week, likely on doom-and-Covid-19-gloom. Lets’ see if that moving average, now near 10.56 provides any support.
NOK – the krone suffered a brutal decline last week and risk-on in Europe is finally seeing the currency put in a show of support. A lot of work to do to reverse the damage -
Upcoming Calendar Highlights (all times GMT)
1345 – ECB President Lagarde in parliamentary hearing
1400 – UK Bank of England Governor Bailey to Speak
1430 – US Dallas Fed Manufacturing
1800 – US Fed’s Mester (Voter) to Speak
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