Head of FX Strategy
Summary: The Labour opposition and her own party are shouting down Theresa May’s latest attempt to reintroduce her deal for a fourth vote, sending sterling back to relatively unchanged levels after a short rally attempt.
Commentators are divided on the reasoning behind the vote, but perhaps the move was aimed at bringing enough Labour Remainers who fear that if the UK doesn’t get May’s quite soft Brexit deal, the process risks dramatically raising the odds of a No Deal Brexit. But the obstreperous reaction from nearly all sides in the wake of May’s presentation of the new deal suggest, as John Authers puts it, that the deal is “already an ex-deal” and “as dead as John Cleese’s parrot”.
It appears that the mostly likely course from here is the eventual calling of elections after May bows out in disgrace after the vote on the deal most likely fails in early June. The overriding fear then is that this leads either to a hard Brexit or a Corbyn government – neither of which looks sterling friendly. Perhaps a negative pall over Europe and the euro over the EU Parliamentary election could keep EURGBP below 0.8800, perhaps not, but the pressure on GBPUSD could quite possibly rematerialise for a run at the 1.2500 support and then some.
Elsewhere, the market continues somehow to maintain a positive mien on general risks from the US-China trade showdown as US equities managed to close with a solid gain yesterday after the US offered a 90-day exemptions on the implementation of the Huawei ban that could be seen as an attempt to salvage the process.
The rhetoric from the Chinese side, meanwhile, has taken on even more dramatic posturing and the latest theory is that China could seek to limit exports of its rare earth resources, so important in many technical and military applications. The market seems staggeringly unconcerned – I still struggle to understand the US equity market and the complacent risk spreads elsewhere (like corporate high yield and emerging markets), which have widened modestly, but are hardly flashing red. A look at emerging market equities, however, does suggest strong concern, however, so there are divergences.
Tonight we get a look at the latest batch of FOMC minutes, but the market is so keyed into the risks of the US-China trade headlines that it is hard to see what news these could bring. Every attempt to gin up a reaction to the Fed’s dovish shift since the watershed Powell shift in Januray has failed to sustain a USD weakening for any appreciable length of time.
Short AUDUSD and EURUSD, but looking to abandon if no further progress ahead of the weekend.
Long AUDNZD for a strategic trade with stops below 1.0400 for a move back toward 1.1200
EURUSD has traded within 30-40 pips of its recent cycle low ahead of the EU Parliamentary elections starting tomorrow and the flash May PMI’s out tomorrow. Some of the recent EU lending data suggest some significant further weakening is baked into the cake and the ECB is pushing on a string and has no mandate to expand its support for the economy. The question is whether traders are particularly interested in sending an already weak euro over the edge, with so much focus on China’s plans for its currency.
We’re sceptical that the downside momentum will impress unless we see a dramatic escalation of peripheral spread widening on the EU elections results (doubtful – these are more likely to show a general euro-skeptic malaise from both sides and evacuation of the political centre) or a move by China to allow the CNY to fall. Without either of these, EURUSD may only be able to move to 1.1000 or so on a run lower.
USD – the greenback at the strong end of the range – is China’s renminbi policy the only thing that can spark one last dollar surge that forces the Fed to get ahead of easing expectations down the road?
EUR – the euro eyeing those lows for the cycle versus the US dollar head of the EU Parliamentary elections beginning tomorrow. We also look to the flash May PMIs tomorrow for a fresh read on the economy.
JPY – the yen backing down as the US treasury yields have climbed back higher and risk appetite has managed relative stability despite the latest bout of trade war concerns. The USDJPY bounce so far is arguably consolidation, but if it extends much higher (well above 111.00= will start to look like a reversal.
GBP – situation is as unclear as ever and if May was always going to fail to deliver the Brexit deal, it should prove refreshing to have her exit the stage.
CHF – the rebound in risk appetite offering minor pressure on the franc – let’s see where the attention is most intense for CHF – on Brexit risks, EU existential risks (Italy the only pressurizer there) or general risk appetite. A big decision for Switzerland on the way next month should be kept on the radar. https://www.home.saxo/insights/content-hub/articles/2019/05/20/swiss-vote-for-eu-rules-but-the-real-hurdle-is-yet-to-come
AUD – China’s iron ore prices have gone vertical and Australian stocks are at a record high, celebrating the higher commodity prices and an expected string of RBA rate cuts. And yet the AUD is in the dumps. Tight fiscal and loose monetary policy are a currency bear’s best friend, it seems.
CAD – the loonie may be over-achieving here, but looks like for now that the US elimination of the steel and aluminium tariffs is a friendly signal that keeps CAD more correlated with the direction of the USD in the crosses. AUDCAD has been on an incredible run lower, for example.
NZD – Q1 Retail Sales came in a hair stronger than expected, but expectations were weak. The recent episode of AUDNZD remaining rangebound even as AUD sold off on the latest RBA guidance offers a boost of confidence for AUDNZD bulls.
SEK – watching the reaction over the EU PMI survey numbers tomorrow and the parliamentary election as SEK generally seen as leveraged to external demand. Loose fiscal needed to spark a SEK rally of note.
NOK – the krone has some room to pull stronger as long as the market taking trade war risks in stride, but concern lingers on the oil price outlook here.
Upcoming Economic Calendar Highlights (all times GMT)
0830 – UK Apr. CPI / RPI / PPI
1230 – Canada Mar. Retail Sales
1400 – US Fed’s Williams (Voter) hosts press briefing
1410 – US Fed’s Bostic (Non-voter) to speak
1800 – US FOMC Meeting Minutes
0030 – Japan May Flash Manufacturing PMI