FX Update: Trading Brexit headlines a dangerous pastime

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  The path to a Brexit deal remains complex, particularly given UK parliamentary dynamics, but the market wants to believe for now that further progress toward a deal is likely. Elsewhere, Chinese reluctance to sign on the dotted line on the first phase trade deal has somehow failed to trigger any wider unease, at least so far.


Sterling is bid again this morning as the EU’s Barnier made a few promising noises on the feasibility of a deal, while the Dutch foreign minister weighed in on the need for the UK to “improve” its proposal. One point that could prove difficult is how a “deal in principle” between the Johnson government and the EU, which it now seems can quite quickly be made, makes its way through parliamentary approval, especially ahead of the October 31 deadline. Will Johnson agree to a delay in order for details to be hashed out, or will he try to force a No Deal if Parliament votes against his plan, while declaring the fault for the No Deal rests on their shoulders? Still too many questions for traders to draw a conclusion, but perhaps the very threat of Johnson's blame disciplining the parliamentary vote in favour? Market looks rather confident we are headed for a deal.

The market took the news remarkably well yesterday that China is not willing to sign on to the “phase one” trade deal until further talks are held. This was according to a Bloomberg article yesterday, and many noted that no Chinese press sources corroborated Trump’s declaration that this was a deal for the ages. The key sticking point, if the sources are to be believed, appears to be the mid-December US tariff schedules on remaining Chinese imports. Trump’s desperation to keep the equity market elevated and avoid further economic damage from trade policy ahead of the 2020 elections could yet see him walk back these tariffs, but others have pointed out that there could be more political traction to be found in taking a strong stance against China and blaming a portion of the economic fallout on the too-tight Powell Fed.

The Turkish lira has seen a rocky ride over the last few sessions, spiking lower on concerns that the outrage among US lawmakers at Trump’s abandonment of Kurdish forces in Syria would prompt harsh sanctions from the Trump administration. But the lira found relief as yesterday’s US sanction measures were far more modest than feared, including steel tariffs, a cessation of trade deal talks, and sanctions against individual government ministers. Going after the jugular would have been a move against Turkish banks. This morning, the lira is back on the defensive a bit as Volkswagen. All in all, Turkish assets are at extreme risk here given the dual risk of EU disengagement and even sanctions and ongoing risks that Trump is forced to extend the US sanctions due to domestic pressures.

Chart: NZDUSD
The kiwi has been under pressure to start the week as China’s import numbers released Monday suggested weak demand and on the disappointment that China is not yet ready to sign on to the phase one US-China trade deal. New Zealand releases its Q3 CPI tonight – an important test for the kiwi in terms of testing the RBNZ’s patience if we see a downside miss.  For now – the smart technical reversal after the marginal new multi-week highs on Friday is feeding the bearish case for a test of the lows here and possibly more. The lower red dotted line on the chart around 0.6235 is the low from back in 2015 - a reminder that recent lows were an attempt at taking out that major level.

Source: Saxo Group

The G-10 rundown

USD – the US dollar has managed rather well, considering the “Not QE” Fed balance sheet expansion announcement on Friday. But the action in USD pairs lacks conviction.

EUR – waiting for the October ZEW Survey out of Germany this morning, which is expected to show a further worsening in current conditions and expectations – we need good news out of the EU economy and/or a shift in policy focus to fiscal to get a sustained bid under the euro.

JPY – the yen remains on its back foot as global long yields remain in the upper part of their recent range and to see this change, the mood needs to change back to risk off and lower yields. Meanwhile, USDJPY is not far from a rather large area near 109.00, though to sustain a break above that level that could require a game changing move above 2.00% in US 10-year benchmark.

GBP – sterling firmer, if choppy, but plenty of questions remains – risk/reward certainly more balanced at these levels.

CHF – EURCHF slipping back above 1.1000 this morning – further upside requiring some combination of good news on Brexit, positive EU developments and/or higher global bond yields. Regardless, a close reasonably above 1.1000 would look promising from a technical angle.

AUD – RBA minutes show the bank is nervous about the approaching lower bound but moved anyway – AUDUSD looking heavy if it cuts another 50 pips lower here, but it has been going nowhere for the last two months.

CAD – David Rosenburg (@EconguyRosie on Twitter) pointed out on Friday that private payrolls were actually a weak -21k in September, while the government payrolls rose over 50k for the month, which he attributes to possible election considerations. The CAD reaction to a volatile data series does look a bit overdone, given action elsewhere in USD crosses, in particular.

NZD – the Q3 CPI up tonight on whether the kiwi looking to cement this turn lower as the market might have to price in a November RBNZ cut on a bad miss (currently at virtually zero odds).

SEK and NOK – NOK not liking the turn lower in oil and EURNOK poking back to the highs for the cycle. The SEK is looking the other way, but EURSEK only looking at technical reversal potential if it trades back below 10.80-75.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0900 – Germany Oct. ZEW Survey
  • 1230 – UK BoE’s Vlieghe to Speak
  • 2145 – New Zealand Q3 CPI
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)

Saxo Capital Markets HK Limited
Rooms 2001-02, 20/F York House
The Landmark
15 Queen's Road Central
Hong Kong

Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: Rooms 2001-02, 20/F York House, The Landmark, 15 Queen's Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

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

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.