GBP: Close, But No Cigar

Yet more Brexit uncertainty surrounding sterling is just one thing we're watching in the FX markets this Monday.

Source: iStockphoto

USD: More than just a 2% correction?

The DXY is now off 2.5% from the highs seen at the start of the month. This has been driven by the conviction that the Fed will cut on 30 October (88% priced) and some progress on both Brexit and US-China trade relations. Since the start of the rally from February 2018, dollar corrections have typically been in the order of 2-3% - suggesting nothing out of the ordinary so far.

This week could see the dollar edge a little lower, however. There certainly seems some warmer mood music out of both Washington and Beijing. And moving into the blackout period ahead of the 30 October FOMC meeting the Fed will have little chance to counter the market’s conviction call of a rate cut. DXY rallies could stall at 97.76/75 before 97.00 is pressured. Elsewhere, Canada goes to the polls today. The result is expected to deliver a minority government, where our team believe a minority Liberal government would be slightly more bearish for CAD.

EUR: Focus on October business sentiment this week

The focus for this week in Europe will be the October PMIs released on Thursday and Friday. October export data out of South Korea and Japan suggests there has been little improvement in the international trade environment, but let’s see whether there's any progress on US-China trade, Brexit or the scope for German fiscal stimulus registers in Europe. We see EUR/USD in a 1.1110-1.1200/10 range.

GBP: Brexiteers dust themselves down and prepare to go again

The Johnson government never had to the opportunity to seek a Meaningful Vote on Saturday and instead saw an amendment go through, which effectively diffuses the UXB of a No Deal Brexit on 31 October. Latest reports suggest the governing Conservative Party will pursue the legislative path (probably in votes this week) to get last week’s Withdrawal Agreement (WA) through parliament.

For GBP, this month’s spike from 1.22 to 1.30 somewhat amazingly has not delivered any meaningful adjustment in GBP short positions. Data released on Friday and covering activity to the prior Tuesday (15th) saw speculative GBP short positions actually increase, but the net short remains around the 30% of Open Interest level as some GBP longs took profit. This all suggests GBP has some more upside should the path open for the WA. We suspect Cable finds support in the 1.27/28 area before retesting 1.30 later in the week – but clearly, there’s plenty of risk.

BRL: Petrobras auction should provide some support

Despite the positive fiscal reform this year, the Brazilian real is still down 6% YTD against the dollar. Driving this underperformance has been the collapse in Brazilian inflation and interest rates, which has allowed Brazilian corporates to take out cheap domestic loans and pay down troublesome FX debt. This has prompted capital outflows of US$32bn over the past twelve months.

One upcoming BRL positive, however, is the auctioning off, by Petrobras, of drilling rights. Some large auctions are coming up (the potentially largest on 6 November) which will see some of the biggest oil names bidding over US$20bn for drilling rights. Depending on when the settlement date for these rights (some seem to be in December) this story could be quite supportive for the BRL into year-end.