Morning Commentary: The Sound of Silence

Foreign Exchange - Morning Commentary
The Sound of Silence
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Markets have kicked off the week in a fairly quiet manner as illustrated by the euro trading in a tight range overnight.  However, the relative calm in the market masks an underlying risk picture that remains a bit mixed. 
 
Oil has added to its Friday gains, rising by as much as 2% earlier this morning, as tensions in the Persian Gulf remain high after Iran seized a British tanker.  In one of her last moves as PM, Theresa May convened a meeting of top officials and ministers to meet at her office earlier today in an effort to de-escalate the situation.  Additionally, crude has also received support from further supply disruptions in Libya as an unidentified group has shut down the country’s largest oil field. 
 
Continuing with the UK, the British pound continues to find itself under pressure after hitting a ~2-year low this past week.  The GBP has been responding to the increased likelihood of a no-deal Brexit as the race to find the next UK Prime Minister draws to a close.  Boris Johnson is widely expected to win, and his demand that ministers accept the possibility of a no-deal Brexit should trigger a string of resignations should he be elected.  Polls are scheduled to close today at 5 pm London time with the winner announced Tuesday and assuming office around midday on Wednesday. 
 
Finally, over in Asia, a series of goodwill gestures over the weekend have once again raised hopes on US-China trade talks with Chinese officials indicating a plan to purchase more agricultural products and US officials discussing the possibility of resuming sales to Huawei.  Additionally, Chinese state media has indicated that face to face talks with the US may happen soon. While these developments are certainly positive, history has taught us not to get too excited about positive news out of these trade talks and any long term deal is still likely a ways away.        
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Japanese PM Abe’s ruling LDP-Komeito coalition has won a majority in the Upper House.  Additionally, BoJ Governor Kuroda is in Washington DC and is expected to speak today.   
  • Tensions in Hong Kong remain elevated as police used tear gas to disperse protesters over the weekend.  For now, Chinese officials have ruled out the possibility of using military forces, however a long term solution remains elusive; it is possible that China could overhaul its management of the former British colony. 
  • The ECB is scheduled to meet this week and will be announcing its rate decision this Thursday.  While the markets are not looking for a cut until September, there remains risk that the ECB could act this month.  At a minimum, expect the ECB to lay groundwork for a cut later on this year. 
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