Head of FX Strategy
Summary: PM May's ill-received vote shift pushed GBP lower but has not lent markets much more visibility while in France, Macron's policy shifts raise the question of deficits.
While UK Prime Minister May’s cancellation of the Brexit deal vote in Parliament has grabbed the headlines and punched sterling for steep losses, this by no means provides further visibility on sterling. Elsewhere, the game changer yesterday was French president Macron caving to the protesters and changing policy that will sharply expand the French deficit and thus dramatically shift the EU narrative.
Sterling was dragged sharply lower after UK Prime Minister May cancelled the vote yesterday and announce that she would meet with counterparts around the EU to appeal for measures that could change a future vote. On the EU side, there is a refusal to change the deal, though promises were made to offer “assurances” that seek to skirt the worst fears surrounding the “Irish backstop” issue that has been a lightning rod of criticism. More below on the GBPUSD chart.
Macron spoke late yesterday and offered a partial mea culpa and a number of policy changes, including tax cuts and a raise of the minimum wage. Most importantly, the measures will increase France budget deficit to well beyond 3.0% next year – possibly as high as 3.5-3.6% depending on the pace of French growth yesterday. This is a game changer for the EU narrative as we now have an essentially core country abandoning fiscal discipline and leaving zero credibility in negotiations with Italy in the populist governments’ plans there to widen deficits.
Were it not for the latest Brexit developments dragging sterling through the dirt, the euro might have rallied more sharply yesterday. Solidarity on the need to abandon austerity would shift the goalposts and could drastically improve the outlook for the euro eventually. Hurdles remain – especially if the EU makes a catastrophic miscalculation on Brexit as we discuss in the chart caption below – as well as whether the new German leadership can sign on to a more expansive fiscal stance – and importantly, one that is pan-European and not aimed at a narrow domestic agenda.
Chart: GBPUSD
Cable the big move yesterday on the news that May would cancel the parliamentary vote on the Brexit deal. She is unlikely to get the EU to salvage the extant deal sufficiently. If the EU gambit is to play chicken on Brexit in the hopes that they can wring a vote from the British public in some future referendum between a stark “WTO no-deal” terms and “pre-Brexit vote status quo” I think they have another thing coming. If this is the gambit, then it would still likely require an extension of the Article 50 deadline to allow some combination of new elections and the definition of second referendum language. Regardless, GBPUSD likely to provide far more beta to the direction in sterling than EURGBP, where a darkening scenario for sterling would feed collateral damage into the euro.
The G-10 rundown
USD – the US dollar generally firm even as equities avoided a fresh meltdown late yesterday. GBPUSD likely a significant driver as it hit fresh lows. The USD may trade in choppy fashion until we get a look at the FOMC statement next week and Powell’s press conference – a dovish hike is the consensus scenario. USD bears will hope for an extremely dovish hike or no hike at all and a melt-up in risk assets.
EUR – Macron’s move to expand the budget is a game-changer for Europe – on the one hand, it eases the focus on Italy, but on the other raises the stakes for EU solidarity coming into 2019. Euro might have taken the news of fiscal stimulus more positively were it not for the aggravation of Brexit fears weighing so heavily on sterling and indirectly on the euro yesterday.
JPY – the yen having a difficult time of late firing consistently as a safe haven, and perhaps Japan’s latest growth data is behind some of the market’s reluctance to take a shine to the currency – nominal GDP in Q3 was down -0.7% on the previous quarter.
GBP – not sure I understand why the market saw the parliamentary vote cancellation as such a shock. It looked headed for an inevitable defeat anyway and there is no clarity on where the situation heads next, but GBPUSD likely to show far more beta to developments than EURGBP, where the euro has to take some collateral damage if sterling continues to weaken on fears of a no deal.
CHF – yesterday’s rally in the franc likely linked to the sterling weakness on latest Brexit developments, but if the fiscal stimulus bug spreads across the EU, the euro eventually finds support – that may have to await longer term developments once and if short-term Brexit hurdles are cleared.
AUD – AUD traders struggling for traction, but we have strong concerns on Aussie as the housing bubble unwinds on the risk that the RBA and the government have to respond along the lines of the US in 2008-09 if credit seizes up. CNY relative stability the only thing anchoring AUD here short term?
CAD – an easier path to downside on the weak housing theme as oil prices drop and there is more to unwind in policy expectation terms from the Bank of Canada.
NZD – the RBNZ’s Orr out speaking late today and have to wonder if he is beginning to get a bit uncomfortable with the kiwi’s relative strength. Given weak risk appetite backdrop, the strong kiwi of late sticks out like a sore thumb.
SEK – short Swedish rates holding up well, given the recent pressure on the currency as the market hanging in there in favouring a view to a Riksbank hike next Thursday. The inability to form a government after the election all the way back in September may be finally weighing at the margin as well.
NOK – a fresh downdraft in oil does NOK no favours. EURNOK rally puts the top of the range toward 9.75 back in focus. Norges Bank on Thurdsay will be happy to sit on its hands.
Upcoming Economic Calendar Highlights (all times GMT)
• 1000 – Germany Dec. ZEW Survey
• 1330 – US Nov. PPI
• 1915 – New Zealand RBNZ's Orr to Speak
A new fragmented world order can render some of today's infrastructure obselete, but it also calls for massive new investments across the globe, which requires a new set of strategic and tactical investment strategies.
Steen Jakobsen,
Chief Investment Officer
As globalisation turns to fragmentation, China seems set on playing a role in the global economy, while simultaneously working towards proofing its own economic situation from external shocks and crises.
Redmond Wong,
Market Strategist
The recent bank runs and ensuing challenges are reminicent of something we've seen before. Will it end like the S&L crises of 1986 and 1995?
Chris Dembik,
Head of Macroeconomic Research
Equity markets need to recalibrate to another - fragmented - global world. What's your view on equities in this market - are they going up or down?
Peter Garnry,
Head of Equity Strategy
With every development comes new opportunites, some of which could be in India. Have you considered the country as a part of your diversification strategy?
Charu Chanana,
Market Strategist
A collar is an option strategy that allows some protection while maintaining some upside potential. What investment would you like to use a collar strategy for?
Hans Oudshoorn,
Trainer Academy
There are arguments to be made for many commodities to have upside. Which are you paying the most attention to this quarter?
Ole S. Hansen,
Head of Commodity Strategy
In a very challenging macro environment, which currencies do you think will come out on top?
John J. Hardy,
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
