Morning Commentary: A Reality Check

Foreign Exchange - Morning Commentary
A Reality Check
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Markets have been working off of an optimistic outlook regarding both Brexit and the hope for a successful conclusion to part one of the U.S.-China trade deal, but they received a dose of reality overnight as there is still some heavy lifting to be done to reach a successful outcome for both endeavors. Markets have been very volatile overnight as headlines impacting Brexit and the U.S.-China trade talks hit the wires.

Regarding the British pound (GBP), the GBP has had a very wide range overnight as positive and negative headlines concerning the Brexit negotiations caused the GBP to be extremely volatile and whippy. While it is clear that progress is being made, there are still hurdles to overcome and each stakeholder in the negotiation has a different view of the progress that is being made. The GBP is nearly unchanged from where we left it last night but is up nearly 4.75% over the past five days.

Regarding the overall U.S.-China relationship, and in particular, a successful outcome to Phase One of the trade talks, markets got new messaging from China overnight. The U.S. House of Representatives passed a bill supporting protesters in Hong Kong yesterday, and China reportedly backtracked on part of the deal it agreed to last week. The Chinese Ministry of Foreign Affairs said that it would take strong measures against the U.S. if the bill eventually passed. Global equities are trading sideways, but the USD/CNH has weakened for the second day in a row.

Markets will remain volatile as headlines ping pong regarding these two key issues and other geopolitical hotspots play havoc with expectations and price action. Clients should continue to be tactical and take advantage of the volatile price action.
  • The Bank of Korea cut interest rates by 25 bps to 1.25% as expected. The economy remains under pressure as global trade tensions impact Korean exports causing growth to weaken and the UR to rise. The central bank has already cut interest rates twice this year reflecting both weaker growth and inflation that is well below the forecast target of 2%. The Korean won is slightly weaker on the session.
  • U.S. Retail Sales for September came in much weaker at -0.3% against expectations of a gain of 0.3%. This is the first decline in seven months. There was a bit of positive news in that August was revised higher from 0.4% to 0.6%. Markets are wary about a loss of economic momentum in the economy as employment data has been weakening and could impact consumer spending down the road. U.S. interest rates are lower in reaction to the news.
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