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.
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.
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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.
