Head of FX Strategy, Saxo Bank Group
Summary: GBP moved higher following the resounding defeat of PM May's Brexit deal while USDCNY and risk sentiment are driving FX movement outside sterling.
As well, popular sentiment suggests extremely low support for a second referendum. Assuming May survives the confidence vote, we’ll need to shift the focus to what comes from May’s revisiting the deal with her European Union counterparts, now with a bit of added leverage from the size of the deal’s defeat.
I would expect the EU leadership keeps its head firmly buried in the sand and little or no sign of a shift in their position. Another idea is that May will pursues “cross-party” talks with the opposition on what to do next, which makes eminent sense, given that Brexit sentiment cuts straight across party lines – but the question begs whether the political atmosphere in the UK is too dysfunctional for any coherent plan to emerge.
Finally, there is the issue of an Article 50 delay where the complacent assumption is that it will be extended. Something bothers me about the strength of that consensus, but one could also argue that the endgame results in a “no deal” after all, though a no-deal with a number of bells and whistles to soften the impact, including a long timeline to the implementation of said deal.
Elsewhere, risk appetite has been supported on two fronts since the beginning of the week – first by the China’s announcement of tax cuts and second by the reaction to this Brexit deal rejection. The FX implications have been somewhat minimal, with EM currencies and the Antipodeans supported on improvement in risk appetite, not just in equities but also in high yield spreads as junk bonds have been on a tear since the Fed pivoted to a more dovish stance. For the G3, EURUSD’s ambitions to the upside have been tempered by the meandering course that USDCNY has taken after the one off move lower and by the weight of EURGBP in the wake of last night’s rejection – more on that below.
Animal spirits and China’s policy intentions are in the driver’s seat here, with the technical lay of the land for the majors largely inconclusive and messy and market participants lacking conviction and awaiting further signaling. Further policy pronouncements from China are a prominent risk over the coming week or so on rumors of a plenum or other major meeting to set the policy course. But China’s economic data is difficult to interpret at this time of the year and will remain so until the March timeframe or later, due to the impending disruption of the Chinese New Year celebration.
EURGBP has punched below the 200-day moving average at time today, a level now more or less the mid-line of the multi-month trading range as the market takes a positive view on sterling despite May’s historic defeat late yesterday. There is plenty more range to trade to the downside if the market continues to unwind its defensive positioning on sterling on the underlying assumption that neither a Corbyn government or a no-deal Brexit are on the cards.
USD – The market is avoiding taking a USD view for the moment as the USD has traded weaker against surging risk currencies but indifferently versus EUR and JPY. USDCNY and risk appetite the key drivers for the moment, though the US government shutdown could begin to weigh if not resolved (or the impact softened significantly) within a week.
EUR – German five-year sovereign paper dropping to a new local low near negative 40 basis points late yesterday and not bouncing much on the Brexit news as the economic outlook for Germany and the EU remains woeful and tempers enthusiasm for a EURUSD breakout higher.
JPY – yen slipping back higher as risk assets surge, especially EM and likely to continue trading with high beta to global risk appetite.
GBP – May confidence vote today with next steps to emerge in the days ahead, but a survival of that vote puts to rest the prospect for new elections. More interesting is whether the market’s strong assumption of an Article 50 delay is justified. More technical room for a sterling rally as we await developments.
CHF – not much for EURCHF in the latest Brexit developments and struggling to find a pulse or reason to trade CHF here.
AUD – remains bid on the positive spin on China’s tax cuts and positive risk appetite in general as the AUDUSD rally has reached its first important pivot zone between 0.7200 and 0.7250.
CAD – everything went quiet in USDCAD after the big slide from 1.3600 engineered by the Fed’s dovish downshift, and USDCAD looks inversely correlated with the in-turn highly correlated oil price- and equity market moves.
NZD – AUD and NZD tracking in relative strength terms as AUDNZD refuses to make a statement despite New Zealand’s short rates crashing rather aggressively lower recently.
SEK – resurgent risk appetite helping SEK at the margin, but interesting to see how the Riksbank discusses the slide in housing prices and any risks stemming from these. Otherwise, a SEK breakout also needs a pick-up in sentiment on the EU economy.
NOK – EURNOK having another go at taking out the pivotal 9.75 area that would help underline that the move to 10.00+ was an aberration.
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