The Never-Ending Brexit Quandary

Quick Take

The currency that stands out above any other is the Kiwi, with the pricing out of rate cuts since the last RBNZ policy meeting having set out the currency for a distinctive short-term trend at a time when the rest of Central Banks have been sounding unambiguously more bearish. The rest of the currency fluctuations make for a more complicated jigsaw to solve, as the USD and the JPY still enjoy macro bullish trends due to the spells of risk aversion from last week, although this week’s abrupt reversal towards appetite to seek out riskier bets has sunk the currencies as the 2nd chart shows. But no currency shows more variable and irregular gyrations than the GBP, taken hostage by the never-ending Brexit quandary. The Canadian Dollar starts to show signs of life again, with the onset of its solid performance originated off last Friday’s back-to-back blockbuster Canadian jobs report. The Aussie has also been faring quite well despite the recent blow in yet another Australian data (consumer confidence). In short, continue to pay much more attention to the developing micro trends to increase the odds of being on the right side of the flows. This is not a time to take much guidance from the macro-developing trends as the irregularity of the risk swings coupled with the absence of central bank policy divergences create an environment where flows remain king vs macro positions.

Key Narratives in Financial Markets

  • The Brexit vote on the revised May-Juncker deal was rejected in the UK parliament, with the next focal point a vote on Wed about blocking a ‘no deal’ Brexit and Thursday’s vote on ‘Article 50 extension’. These outcomes are still conditioned to the EU’s position (an absolute mess!)
  • Australia’s NAB and Westpac surveys, paired with the latest finance approvals, raises the odds of the RBA eventually cutting the benchmark rates. The pricing is for 2 cuts so far in the next 12 months, with the Aussie still not reflecting such pessimism in its pricing.
  • The US inflation data came a tad softer than expected despite the market has definitely 'moved on' as the price action demonstrates and no longer pays close attention to the rather benign CPI readings (the era of deflationary pressures goes on). CPIs are not a driver for markets at this stage.
  • US trade representative Lighthizer said to be looking for a ‘sweet spot’ to remove Canada and Mexico tariffs while protecting the US industry.
  • US trade representative Lighthizer notes critical stage in the US-China trade talks, and that a solution to current outstanding issues must be addressed if a deal is to be inked between the US President Trump and Chinese President Xi.
  • Saudi Arabia has proposed to extend Oil output cuts until year end according to Tass and Interfax. The news has been well telegraphed in recent weeks and should be interpreted as almost fully priced in by the market, even if residual demand for Oil still observed.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO - Risk On Risk Off Conditions

From a risk perspective, the soothing of fears in equities continues as the marginal gains in the S&P 500 after a midday rebound demonstrate. The 0.4% gains in the benchmark index add to the vigorous rise from Tuesday, which has resulted in both the micro and macro slopes to turn bullish. A completely different picture can be observed in the fixed income market, where if we take the US 30Y bond yield as the barometer to take the pulse of the dynamics in global yields, the trend is firmly bearish, with fresh lows printed as the US30Y breaks (marginally) the 3% level amid the seemingly global coordinated pattern of new easing measures considered by G10 Central Banks. The rapid appreciation in the pricing of US bonds (lower yields) is also weighing on the appeal towards the US Dollar, as the overall micro risk appetite mood seen in stocks underpins the sell-side bias in the DXY. The latest dynamics, therefore, are best described as ‘broad USD weakness’, which makes the direction of the equity market all the more relevant to determine the susceptibility towards risk. However, with the DXY now retesting the ECB-induced demand area amid a compressive price pattern, should the USD regain its mojo, we’d be realigning the macro ‘weak risk off’ environment with that of the micro landscape, which would not be welcoming news for risk amid a clear downtrend in yields. Overall, the dynamics are benign for risk-seeking strategies but pay attention to the next fluctuations of the DXY as they may be key to determine commodity-linked FX and the Yen.

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The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth ...

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