6 minutes to read

Sterling wilts on no-deal risks

John Hardy

Head of FX Strategy

Summary:  Sterling is declining as May's Brexit deal faces parliamentary opposition, raising the twin spectres of a no-deal Brexit or, worse yet for the pound, a Corbyn-led government.


Currency traders continue to hold their collective breath until the Xi-Trump summit at the G20 meeting this Friday and Saturday. Meanwhile, sterling is edging lower again as the market recognizes that May’s Brexit deal is unlikely to pass a December parliamentary vote, raising the risks of a no deal, or perhaps even worse for the currency, a Corbyn Labour government.

A flurry of activity in early European hours this morning in all things China-linked (for example, a brief pump-and-dump in AUDUSD and Nasdaq futures) after a Chinese foreign ministry spokesman’s words were over-interpreted and suggested that a new development was afoot, when in fact he was only referring to the November 1 Xi-Trump phone call and the intent expressed to reach an agreement on trade. 

Most currencies are locked in nervous ranges ahead of the Xi-Trump meeting to take place at the G20 summit in Buenos Aires on Friday and Saturday. We’re far from hopeful that anything promising will emerge from the meeting, although some sort of short-term ceasefire in the hostilities to allow for further discussions could be in the offing and produce a modest risk-on rally into year-end. Even that may be too much to ask.

Note that this evening the Reserve Bank of New Zealand will publish its latest Financial Stability Report and RBNZ Governor Orr will discuss the report at a news conference and later before a Parliamentary committee. Orr has been one of the more consistent doves among central bankers, but the kiwi got a boost earlier this month from strong wage data. Much of the jump in short NZ yields has been unwound over the last two weeks, so the support for the strong kiwi is rapidly fading and a dovish spin on the FSR could change the tune for the currency.  Regardless, any immediate reaction risks getting bottled up until the other side of the Xi-Trump summit.

Watch out for the recently appointed Federal Reserve’s Clarida (Federal Open Market Committee voter and on Fed’s board of governors) out speaking later. His most recent appearance was read as dovish as he advocated more data-dependency for further rate hikes from here. Fed chair Powell is out speaking tomorrow at the New York Economic Club and the FOMC minutes of the November meeting are up on Thursday. All in all, we should have a sense of whether Powell will continue to downshift the urgency level or keep his cards close to his vest. Given a 30%-plus reversal in crude oil prices from the top, the market is likely to take the October PCE inflation data with more than a grain of salt. More important will be the next average hourly earnings data next Friday .

Besides, this Fed is likely highly reactive to Clarida’s incoming data and the latest sense of the US-China trade relationship after this coming weekend. A Fed guidance change to the dovish side is most likely to coincide with rather alarming prospects for the US economy, so any celebration in risk assets may be rather short-lived. Recall that back in 2007, the Fed cut by a chunky 50 basis points in September and the equity market rallied for just under a month before lurching into a historic collapse. Back in 2001, the first rate cut came over nine months after the top in tech stocks and a few months after the broader market top in equities, although that first cut did generate an epic and short-lived short squeeze.

I would lean more toward a 2001 setup rather than a 2007 setup this time around. And my underlying assumption is that the USD could have a hard time falling despite a Fed climbdown as long as risk appetite is faring poorly.

Chart: GBPUSD

Cable is nearing its recent lows and looking heavy as it is quite clear that the current deal won’t pass a December parliamentary vote without a significant change of attitude from a large swath of MPs (marginally possible if, as one pro-deal Tory indicated, the popular exhaustion with the issue is so profound that the average Brit just doesn’t care anymore). Regardless, the odds of a no-deal Brexit are as high as they have ever been, and the route to a stronger sterling is difficult if the two alternatives are no-deal on the one hand (albeit one that is non-the-less extended for practical reasons to avoid excessive disruption) and on the other, a new election pointing to Jeremy Corbyn as prime minister. Below 1.2661, there’s not much support until 1.2000 save for a round number like 1.2500.
Enlarge
Source: Saxo Bank
Upcoming Economic Calendar Highlights (all times GMT)

• 1330 – US Fed’s Clarida (Voter) to Speak
• 1400 – US Sep. Home Price Index
• 1500 – US Nov. Consumer Confidence
• 1600 – ECB’s Mersch to Speak
• 2000 – New Zealand RBNZ Financial Stability Report
• 2200 – New Zealand RBNZ Orr Press Conference

You can access both of our platforms from a single Saxo account.

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 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 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-hk/legal/disclaimer/saxo-disclaimer)