Morning Commentary: The Final Countdown…Once Again

Foreign Exchange - Morning Commentary
The Final Countdown…Once Again
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
As markets move through the month of June, we once again find ourselves facing a Brexit deadline.  While the negotiation period doesn’t technically end until the end of the year, the UK has until the end of this month to decide whether or not it wants to request an extension to negotiations.  

Thus far, the UK government has remained steadfast in its stance and has ruled out asking for an extension.  PM Johnson has also stated he will decide in June whether to call off the negotiations and prepare for a no deal exit or continue because a deal seems possible.  Throughout the history of Brexit, we have seen numerous occasions where negotiations broke down only to be saved with some sort of last minute extension or deal so clearly nothing is ruled out.  

Assuming that the UK does indeed stick to its stance of not asking for an extension, the assumption is that the UK will not call off negotiations either.  Under these parameters, the base case becomes some sort of bare-bones free trade agreement due to the limited timeframe left to strike a deal. Such an agreement likely include some form of non-tariff barriers.  It is also likely that the UK and EU will agree on some sort of phasing in period to avoid a large sudden change.  

If the UK does transition to a basic free trade agreement, then the economy should suffer some sort of economic loss, relative to under a robust free trade agreement, as supply chains get disrupted by greater trade frictions.  This could mean that some of the COVI- related economic losses get locked in for the long term as supply chains never fully recover.  

Ultimately, much still remains unknown and this uncertainty should continue to pressure the GBP and elevate volatility as we move closer to the June deadline.  The risk to this would be for the UK to pivot and request an extension, something that is clearly GBP positive. 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The National Bureau of Economic Research declared that the US officially entered into a recession in February.  This marked the end of a 128 month expansion, the longest since records started being kept in 1854.  While the longest expansion in US history has ended, the unique nature of this downturn, combined with massive stimulus, raises hopes that the current recession will be one of the shortest ones. 
  • On the monetary front, the Fed expanded its Main Street Loan Program to include more businesses.  The central bank will also announce its next rate decision tomorrow with markets widely expecting no change.  On the fiscal front, the rise in equity prices and improved labor market data have reduced the urgency for additional spending.  Congressional Republicans were already cautious and improved economic data provides some cover to delay or completely avoid additional stimulus. The Senate Finance Committee will meet today to discuss the weekly $600 unemployment payments due to expire July 31.  
  • News reports indicate that the US is preparing sanctions against nearly 50 tankers in a bid to block oil and fuel shipments between Iran and Venezuela.  
  • Australian sentiment continues to improve but still remains historically low.  Business conditions improved to -24 from -34 and business confidence improved to -20 from -46.  For context, over the past 5 years, business conditions averaged ~8.5 and business confidence averaged ~2.9.
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