Morning Commentary: Yes, No, Maybe…

Foreign Exchange - Morning Commentary
Yes, No, Maybe...
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Heading into this last weekend, markets were bracing for a binary outcome to last Saturday’s Brexit vote with Parliament scheduled to vote yes or no on PM Johnson’s deal.  As it turns out, it was a resounding maybe.

Ultimately, the planned meaningful vote didn’t take place as the government, instead, voted to approve the Letwin amendment and withdrawal the main motion.  The Letwin amendment delayed approval of PM Johnson’s deal and forced the government to send a letter to the EU requesting a delay to the October 31 deadline.  As such, PM Johnson has sent a request to the EU (unsigned and accompanied by a second letter).  While French President Macron has stated many times that the EU will not grant an extension, my view is that the EU ultimately will.  However, the EU most likely will be in no rush to do so.  A response is not due until 11 pm GMT on October 31, and the EU is likely to use a “wait and see” approach to how things unfold in the UK parliament. 

Given this, do expect the GBP to have support as it appears the parliamentary math is shifting towards the government’s favor.  This shift in parliamentary math is the key driving force behind why the government is expected to seek another vote today, with the speaker expected to announce around 3:30 pm London time whether or not another meaningful vote will be held.  The expectation is that the speaker will not allow another vote as the government’s motion is the “same in substance” as one tabled earlier in the session and cannot be brought forward again; the speaker denied PM May a third vote on the same grounds.

The government is also expected to bring forward its Withdrawal Agreement Bill (the legislation that sets out the negotiated terms of the UK’s withdrawal) for a second reading.  Parliament will then choose whether or not to allow the introduction of the bill.  However, it is important to remember that even if the government approves the introduction of the bill, it does not constitute Parliament’s approval of the government’s deal.  Should an introduction be approved, the second reading will take place tomorrow at the earliest. 

Ultimately, things remain fluid as PM Johnson continues to try and get his deal passed this week.  Expect GBP volatility to remain high due to headline risks as both sides continue to play political chess.
 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Over the weekend, China’s Liu He stated that the two countries have made “substantial progress” in laying the groundwork for a phase-one deal. One of the key remaining issues is China’s desire to have the US commit to holding off on Dec. 15 tariff increases in exchange for the full amount of Trump’s touted $40-50B in agricultural purchases.  To this end, Larry Kudlow, Director of the US National Economic Council, acknowledged the US’s willingness to remove December tariffs. 
  • China is also seeking $2.4 billion in retaliatory sanctions against the US for non-compliance with a WTO ruling in a tariffs case dating to the Obama era.  In July, WTO appeals judges said the United States did not fully comply with a WTO ruling.
  • Canada holds its Federal elections today.  Polls continue to show a tight race as well as a 90% chance that no party has a majority.  The impact on USDCAD should be minimal given the strong likelihood of a minority government and large overlap between policies for two leading parties.
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