FX Update: Brexit fizzles, too little sizzle elsewhere FX Update: Brexit fizzles, too little sizzle elsewhere FX Update: Brexit fizzles, too little sizzle elsewhere

FX Update: Brexit fizzles, too little sizzle elsewhere

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The UK Parliament voted to move forward with the Boris Johnson Brexit deal on the second reading vote, but did not agree to get Brexit done before October 31, sidelining sterling for now as we await the next round of headline risks in the weeks to come, albeit with no real fears of No Deal risks returning. Elsewhere, traders are sitting on their hands, possibly due to the wait for US-China trade deal news.


The vote in favour of Boris Johnson’s deal with a reasonable 329-299 majority, given that the Northern Irish DUP government coalition partner of voted against. But the 322-308 vote against the compressed timetable to get Brexit delivered before the October 31 deadline means at least another few weeks of political fighting over amending details of the Brexit deal and possibly a UK general election. It seems clear that Brexit will happen, but the further delay could inflict additional damage on an already struggling UK economy if investment decisions are held back. Sterling got no boost from the first  vote and saw a fairly orderly consolidation on the second vote – we suspect there is more consolidation risk tactically for sterling crosses, with some outside risk of a bit larger retreat if we see a dramatic worsening in UK data for the next couple of data cycles, as this could change the narrative and assumptions around BoE policy.

We had a good discussion in today’s Market Call podcast on divergences in risk appetite, where basic measures like the VIX, the standard measures of corporate credit spreads and emerging market credit spreads are all strongly in the green and suggest rather robust risk appetite. But elsewhere in the shadows, there are signs of strain, particularly in the worst quality junk bonds, the leveraged loan market and in some stories in private equity. As well, USD liquidity issues are ongoing as evidenced by the over-subscription for the Fed’s 14-day repo yesterday (over $50B in demand for the $35B available.) In short, these signs are unsettling on risks of contagion, even while traditional financial condition indicators look benign.

Chart: USDJPY
USDJPY has avoided making a statement for more than a week now as we await a signal from the US bond market on whether US recession risks will drive a new dip in long yields (traditionally very JPY supportive) and see risk sentiment catch a cold. Any upside hopes for USDJPY traders would likely centre on the hopes that the US recession risks will not be realised and that the US 10-year benchmark is set to rise above 2.00% again. A less benign scenario for USD upside could be linked to liquidity issues into year end that the Fed has perhaps underestimated despite its resumption of balance sheet expansion. Regardless, the chart looks pivotal here as USDJPY has probed above recent range highs but has not yet taken out the pivotal 109.00 area that would open up the upside. To the downside, a strong signal from the bond market (lower yields) and a close back below 107.50 would begin tilting momentum back lower.

Source: Saxo Group

The G-10 rundown

USD – a small bounce in the US dollar’s fortunes yesterday as Brexit failed to bring the full-on breakthrough hoped for and perhaps simply on lack of further catalysts or flow to drive it lower after the recent move of reasonable magnitude. Not sure where the market looking for a catalysts, but recent inter-market correlations suggest risk appetite is negatively correlated with the US dollar.

EUR – little anticipation around the ECB tomorrow, as the warring factions aren’t in agreement on policy. It is clear that the ECB has reached the end of its policy rope – interesting to hear how Draghi treats his final press conference.

JPY – the yen getting a boost from the support in the bond market yesterday as the US 10-year benchmark yield approaching important resistance ahead of 2.00%. A further shift lower in yields and risk appetite needed for the yen to thrive – USDJPY needs to tilt one way or another as we discuss above.

GBP – plenty of room for tactical consolidation. Widely circulated chart yesterday that I retweeted showing collapsing tax revenues, a classic indicator of a steeply slowing economy. The Brexit delay doesn’t help and tremendous momentum will need to develop once the Brexit is in place to counter massive built-in damage that is likely here and for the next couple of quarters, according to credit impulse measures.

CHF – EURCHF sidelined by lower yields and lack of further Brexit process. The catalyst may need to come from fiscal stimulus in the EU if this pair is to blast out of the range to the upside.

AUD – the AUDUSD rally needing to take out the sub-0.6900 range highs to suggest a break higher is unfolding, though the 200-day moving average has also been a key resistance indicator this year, currently around 0.6965.

CAD – weak retail sales out of Canada yesterday, with the core at -0.2% month-on-month in September, but there was little impact on Canadian rates. The

NZD – while we await a pulse in AUDNZD, the NZDUSD chart has reached up into the critical resistance zone if the pair is going to remain in a bear market, with a local pivot (the September high) at 0.6450, the major early 2019 lows just below 0.6500.

SEK – Riksbank meeting tomorrow not seen as a major catalyst, with some risk that the recent runup in Swedish short rates is not supported by Riksbank guidance – EURSEK looking pivotal here, as it never quite made the knockout blow to the downside.

NOK – Recent new highs for the cycle as Norges Bank set to meet tomorrow – can they avoid talking FX in the statement and linking it to rate guidance after flattening guidance at the previous meeting?

Disclaimer

The Saxo 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.