After a delay in the December 11 Meaningful Vote, the UK Parliament is set to finally vote on PM May's Withdrawal Agreement (WA) on January 15, at least as of the time of this writing. As we learned from the last time Parliament was set to vote on the WA, things can shift very quickly so it still remains possible the vote doesn't go through.
As it stands, there is no progress of any significance on gaining further concessions from the EU, leaving the markets to expect the WA to fail. Because of this, the focus will likely be on amendments and the margin of loss as a proxy for May's ability to get an amended version through on a revote. For scale, a loss by over 75 votes will likely be seen as a large defeat. While a loss for the Government will be negative for the GBP, PM May cannot face a vote of no confidence this time around, making a loss less GBP bearish than in December.
Additionally, there are two other key differences this time around that support our belief of an ultimately soft Brexit outcome. The first one is Parliament's requirement for the Government to return with a Plan B within 3 days of a failed vote, as opposed to 21 days. This has pulled forward the Government's contingency planning. Secondly, there are discussions around an extension to Article 50 and we expect these talks to intensify in the case the WA is rejected as most scenarios post-rejection would involve some kind of extension. As it stands, odds makers are only assigning a 33% chance Brexit happens on schedule.
Finally, it has been reported that Labor Leadership will push for a vote of no confidence in the government should the meaningful vote be rejected. If this were to happen, keep an eye on DUP MPs as their votes will be critical.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to remain unchanged at 24.00%
Expectations for rates to remain unchanged at 6.75%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
New Home Sales
Expectations for a gain to 567k following a 544k print
Expectations for a gain of 0.3% following a -2.1%
Expectations for a slight decline in the deficit
Expectations for a slight improvement from 10.9 to 12.0
Expectations for a decline of 0.1%; YoY remains at 2.5%
Expectations for a gain of 0.2% following a 0.2% gain
Expectations for a gain of 0.2% following a gain of 3.2%
Expectations for a gain of 0.2% following a gain of 0.6%
Expectations for a decline of 0.3%; YoY remains at 1.7%
EZ Industrial Prod.
Expectations for a decline of 1.3% following a 0.2% gain
EZ CPI YoY
Expectations for a print of 1.0% again
Expectations for a gain of 0.1%; YoY remains at 1.7%
U.K. Brexit vote
Expectations for the Parliamentary vote today
Expectations for a gain of 0.2%; YoY drops to 2.1%
Expectations for a print of 0.0%; YoY drops to 2.9%
Asia/Japan, and New Zealand
China Trade Balance
Expectations for another large trade surplus
Japan Nat’l. CPI
Expectations for a decline from 0.8% YoY to 0.3%
The EUR finished higher last week driven mostly by USD weakness as dovish Fed comments, the government shutdown/elevated risk premium and a stabilization of risk appetite weighed on the greenback. Near term, we expect the EUR to remained pressured as economic data out of the EZ remains weak as Germany, France and Italy all show softness. Longer term, we still remain constructive as a more data dependent Fed, gridlock in DC and fading fiscal stimulus in the US should soften the dollar. Additionally, we ultimately expect an orderly conclusion to Brexit and Italy as well as trade tensions which should all support the euro as the EZ is a more open export-oriented economy than the US.
The GBP traded broadly sideways last week until Friday when it strengthened sharply on reports on a Brexit delay. This reaction underscores how the meaningful vote on January 15 is the key driver of the GBP. Market consensus is for the Parliament to vote down the Withdrawal Agreement so keep an eye on the margin of defeat, as the GBP's negative reaction should be proportional to the magnitude of defeat. Over the medium term, we remain constructive on the GBP as we expect a deal to ultimately be struck.
The JPY traded sideways for the week and, for all intents and purposes, finished flat for the week. The JPY has been strengthening as the USD and US yields have fallen. Bank of Japan monetary policy is slowly shifting to neutral, and market positioning was tilted toward excessive short JPY positions. Expect US yields to remained pressured leading to a steady to stronger JPY in the short term.
The CAD has staged a strong recovery since the beginning of the year as it is the G10's best performing currency by a decent margin. A recovery in oil prices of over 20%, on expectations of supply cuts, since the lows on Christmas eve, has helped in the CAD's recovery. While BoC kept rates on hold at its most recent meeting, economic activity is expected to recover, especially after USMCA is ratified allowing the BoC to keep pace with the Fed. Over the course of the year, we expect the CAD to trade range bound but in the near term, the CAD's recovery appears a bit stretched.
Positive trade developments, including a surprise drop in by a senior Chinese official to a low level meeting between the US and China, have improved market sentiment and have allowed the CNY to strengthen to its lowest level since the middle of 2018; it is approaching a level where the PBoC could start to be concerned about its sharp appreciation. With China's top trade advisor scheduled to visit the US for trade talks, the bias is for a stronger CNY as long as sentiment remains positive. Over the medium to long term, we still see a weaker CNY as fiscal and monetary steps are taken to support the softening Chinese economy.
After spending the entirety of 2018 on a steady weakening trend, the AUD has been one of the G10's top performing currencies, only trailing the CAD. Positive US-China trade developments have aided the AUD recovery as short AUD has been used as a proxy for trade war concerns. The Reserve Bank of Australia remains firmly planted in neutral for now as the economy continues to give off mixed signals. Expect a steady to weaker AUD this week.
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