Since the beginning of November, the GBP has been one of the G10s better performing currencies as the pace and intensity of positive Brexit headlines have increased. In a sign that the markets are starved for clarity around the direction of negotiations, the GBP has even reacted to innocuous headlines such as a "thumbs up."
While cautious optimism is warranted, as much could still go wrong, the fact that both sides are looking for creative solutions reinforces the view that a "no-deal" exit is an outcome neither side desires. To this end, the upcoming weeks will be critical if a Withdrawal Agreement is to be reached and ratified by yearend. Based on recent developments, it appears that the UK government is attempting to build consensus around a united UK position. If this were to happen, it could be the catalyst for an emergency EU summit at the end of November, clearly a positive development.
However, it is important to note a couple points. The Irish Border issue remains very much unresolved despite a newly proposed backstop review mechanism that has been positively received by the EU. Moreover, the headlines around an imminent "deal" refers only to the withdrawal agreement and not the separate political deal, which is much harder to reach. Additionally, even if a "deal" was to be reached, it would still need to be ratified by the UK Parliament. Without actual details of the Withdrawal agreement, it is difficult to assess the probability of ratification, but the markets are clearly aware of the Government's slim majority as illustrated by the upward skew in short term volatility.
Market will also be paying attention to Italy. The Italian government has to submit its revised Draft Budget Plan to the European Commission by November 13. Of interest will be the very wide gap between the government's current fiscal plan and the European Commission's views with regards to growth outlook and budgetary implications leaving plenty of areas for further confrontation. |
MAJOR CENTRAL BANK ACTIVITY THIS WEEK |
| 11/13 | Thailand | Expectations for rates to remain unchanged at 1.50% | | | 11/14 | Indonesia | Expectations for rates to remain unchanged at 5.75% | | | 11/15 | Philippines | Expectations for rates to remain unchanged at 4.50% | | | 11/15 | Mexico | Expectations for rates to rise by 25 bps to 8.00% | | | | | |
KEY MARKET MOVING ECONOMIC RELEASES |
| 11/14 | CPI | Expectations for gains of near 0.3%; YoY rises to 2.5% | | | 11/15 | Retail Sales | Expectations for a gain of 0.6% | | | 11/16 | Industrial Production | Expectations for a gain of 0.2% after a gain of 0.3% | | | | | |
| 11/14 | EZ Q3 GDP | Expectations for a gain of 0.2%; YoY remains at 1.7% | | | 11/16 | EZ CPI | Expectations for a gain of 0.2%; YoY at 2.5% | | | 11/12 | Germany CPI | Expectations for a decline of 1.7% after a gain of 3.8% | | | 11/13 | German ZEW | Expectations for a decline from 70.1 to 65.0 | | | 11/13 | German GDP | Expectations for a decline of 0.1%; YoY grows at 1.2% | | | 11/13 | U.K. Jobs | Expectations for job gains of 23k; UR to remain at 4.0% | | | 11/14 | U.K CPI | Expectations for a gain of 0.2%; YoY rises to 2.5% | | | | | |
Asia/Japan, and New Zealand |
| 11/13 | China Retail Sales | Expectations for a gain of 9.2% | | | 11/13 | China Indust. Prod. | Expectations for a gain of 5.8% | | | 11/13 | Japanese Q3 GDP | Expectations for an annualized decline of 0.9% | | | 11/14 | Aussie Jobs Report | Expectations for job gains of 20k; UR at 5.1% | | | | | |
| The EUR remains pressured as the DXY continues its ascendancy against almost all major and emerging market currencies. The euro is sitting near its YTD lows as we are writing. Continued expectations of further Fed rate hikes and the Italian – EC budget and political confrontations have hurt sentiment. Most recently, collapsing of oil prices have fueled a DXY rise and euro decline. For the short term, continue to expect a steady to slightly weaker euro. |
| EUR/GBP has continued to collapse over the past two weeks as the GBP has continued to benefit by optimistic and upbeat news concerning a conclusion to the Brexit negotiations. Outside of the Brexit headlines, the GBP continues to range trade and follow similar patterns of other currencies of short term spurts of strength and weakness. Continue to expect the GBP to react to the Brexit headlines and to remain range bound in the near term. |
| The JPY is the top performing major currency this year as it has only fallen by just under 1% YTD but has fallen by 6.60% since March. Many other major currencies have fallen closer to between 5% and 7% YTD. The JPY remains a difficult currency to forecast as rising U.S. interest rates undermine the currency while periods of equity weakness lead to the JPY appreciating as a safe haven currency. Continue to expect a steady to unchanged JPY. |
| The CAD has weakened by nearly 5% this year and by 3% since the October 1. Prior to October 1, the CAD got a short term boost from the conclusion of the new NAFTA agreement (USMCA) and rising oil prices. Since the beginning of October, the CAD has weakened for two reasons: collapsing oil prices and the concern that a new U.S. Congress may revisit some of the provisions of the USMCA. Expect a steady to weaker CAD in the short term. |
| The CNY has fallen by nearly 10% since April as concerns about a U.S. - China trade war and slowing Chinese economy are undermining Chinese equities and the currency. The U.S. – China trade war appears to be part of a longer term geopolitical challenge as the U.S. wants to see a level playing field regarding tariffs and intellectual property etc. We anticipate a long and drawn out trade war; we would anticipate a steady to weaker CNY over the medium term. |
| The AUD is down by 7.50% this year and is one of the weaker G10 currencies. The combination of a weakening Chinese economy, demand for Aussie exports, and the Reserve Bank of Australia on an unchanged monetary path has caused the market to remain short this currency. Most recently, the AUD got a boost on the back of improving Aussie economic data and has corrected higher. Expect a steady to unchanged AUD this week. |
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