Global Macro Strategist
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Latest Macro Monday For WK 43 - Does brexit deal = top of USD strength?
Happy Macro Tue 22 Oct 2019
APAC Global Macro Morning Brief – Sensational Sterling...
The sensational sterling ascent seems to know no bounds... with GBPUSD 1.2963 this Asia Tue Morning, after getting to 1.3013 o/n... just last month this puppy made a low of 1.1959
That’s a +8.4% unlevered... assuming +5x to 10x leverage which is conservative for FX... that’s +42% to 84% in a little over a month... +42% to +84% on a $10m exposure can buy a few drinks around the bar… on a $50m to $100m exposure… one can buy a few bars & lounges... perhaps even a little boutique resort
Again take away here - whether you find it or not, there are always profitable opportunities out there. The likely direction of overall USD strength will be dictated by whether we get a deal & exit (likely USD bearish) or we an extension (likely USD bullish)
The price action on sterling crosses is obviously telling us the market believes the probability of a deal is high. The tactical skew (near-term) from these c. 1.29/1.30 lvls is likely 1.2500 / 1.2400 on an initial moves if we fail & upward of 1.3500 to 1.4000 on an extension to exit scenario
Our options desk point out that it should be noted that the day-to-day volatility on sterling fluctuates extensively, currently on cable is around the 130bp to 135bp, implying a range of c. 1.2795 / 1.3132 – which in KVP’s view is deceptive given what should be a binary move once we are clear on outcome
The structural skew (longer-term) on the other hand is massively asymmetrical to sterling strength imho, check out the quarterly charts we used on this wks’ Macro Monday – from multi-decades perspective, sterling & its respective assets are still very much under owned
Obviously the flipside of looking at sterling & sterling related assets on a longer time horizon is we still have credit impulse that is negative flagged by colleague Dembik, plus Jakobsen points out that the UK is almost certainly heading into a recession which has tended to see a weaker GBP
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Cross-Asset wise o/n was a session that saw us getting back over 3,000 on the S&P 500 +0.69% to 3007, yields continued to rise with US 10s at c. 1.80%, which was also reflected in pullbacks in Gold 1491 -0.37%. Silver 17.56 +0.05% on the other hand was pretty much unchanged unlike the -0.77% in Brent 59.20
The Dollar o/n was predominantly mixed, with small gains on the likes of EUR, JPY & GBP, yet losing vs. the likes of the Kiwi 0.6408 & loonie 1.3089 gaining in strength by +0.41% & +0.30%. The results of the Canadian elections, which are due within the next 24 hours, could have a big impact on loonie direction
For further thoughts on Currencies & John on GBP check out - FX Update: GBP shrugs off Brexit stumble, key week for USD. Our equity strategist Peter Garnry on Q3 Earnings & Amazon in particular, as well as overall comment on equity valuations
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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