Morning Commentary: Brexit – Into the Final Stretch Drive?

Foreign Exchange - Morning Commentary
Brexit – Into the Final Stretch Drive?
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Headlines overnight that the EU and the UK have agreed on a draft Brexit deal have initially sent the markets into jubilation. The British pound (GBP) spiked higher almost touching $1.3000 and reaching its best levels since May; U.K. interest rates and EZ and UK equities also moved sharply higher. Since October 9, headlines about progress in the Brexit negotiations have caused the GBP to rise against the U.S. dollar by nearly 5%.

But since the initial headlines and market reaction, markets have corrected lower as there is still much work to be done. There is still the matter of getting the DUP
Party of Northern Ireland on board and more importantly, the question of whether PM Boris Johnson has the parliamentary arithmetic to get the necessary votes for potential approval on Saturday.

Thus, early morning optimism has given way to Brexit still remaining a bit of a high wire act going forward and markets have reflected those concerns. Since the early headlines, the DUP Party indicated that they are not on board yet which has caused the markets to correct their enthusiasm. While EZ stocks remain in green territory, U.K. 2-year interest rates have returned to ground zero at 0.52% after spiking to 0.63% earlier, and the GBP has given back all its gains to be unchanged on the session.

PM Boris Johnson must be given credit for the progress that has been made. Many in his own party and within Parliament were skeptical of his ability to negotiate a successful conclusion to Brexit, but he has shown determined perseverance. While there are still impediments to a successful conclusion of Brexit, it would appear that we are closer to a conclusion than not as getting the EU on board was paramount to this issue. While the GBP will remain volatile in the short term, it would appear to be better bid going forward.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Australia reported a solid September jobs report. Total jobs grew by nearly 15,000 with full-time jobs gaining 26,200 while part-time jobs fell by 11,400. The UR fell from 5.3% to 5.2%. The probability of the RBA cutting interest rates on November 5 has fallen from nearly 40% to 18%. The RBA has cut interest rates three times in the past five months to help support the economy.
  • U.S. industrial production and housing starts for September were disappointing. Industrial production fell by 0.4% against expectations of a decline of 0.2% as the data was depressed by a strike at GM which appears to be on the verge of being settled. The fall in industrial production is the biggest decline in the past five months. Housing starts came in well below consensus at 1,256,000 as multi-family starts declined sharply; building permits came in stronger than forecast which is a positive sign for future growth.
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