Morning Commentary: Down the Homestretch

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Down the Homestretch  Share this story: Andrew Kositkun Foreign Exchange Head Trader

As with a lot of the European currencies, the British pound has rallied sharply against the USD over the past month although on a year-to-date basis, the pound continues to lag most of its G10 peers.  Looking forward, the view remains bearish.  In the near term, the overall narrative for G10 currencies is likely to be determined by the global backdrop on a day-to-day basis.  But as we move through the second half of the year, the direction of the GBP should increasingly be driven by the BoE’s monetary policy, the ability of the economy to recover from the global pandemic and Brexit negotiations that have yet to make substantial progress.   While many countries are dealing with the unprecedented shock from COVID-19, the UK has to also contend with a second shock in the form of Brexit that will lead to a fundamental shift in the UK-EU trading relationship that is unlikely to be smooth.   This double hit to the economy goes a long way in explaining why UK policy uncertainty remains high.  Granted COVID-19 effects likely drive some of this uncertainty, the comparable US policy uncertainty index has retraced back down around pre-COVID levels, suggesting something other than COVID is driving UK policy uncertainty.  The most logical explanation would be Brexit and the risk premium on 1-year cable options relative to G10 peers supports this.   Brexit negotiations have failed to make progress despite steps taken to intensify talks. This makes it unlikely that we will see the comprehensive and fastest trade deal in history as promised after the Referendum.  While markets still expect a deal to be struck, it really is the substance of the deal that matters with markets moving beyond the binary thought of no deal is bad and a deal is good.  Ultimately, a skinny deal implies the return of non-tariff barriers.  So while a no deal outcome would have the most immediate negative outcome for the GBP, a skinny deal is likely also bearish. HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: US-China tensions continue to grab headlines.  China announced that it will not accept TikTok’s sale to Microsoft and may take action if a sale is forced in what the Chinese government described as a “planned smash and grab.”  Anti-China sentiment has risen on both sides of the political aisle.  This makes moves against China politically beneficial and suggest we should see a ramp up in rhetoric the closer we get to November.  However, China also knows Trump faces a difficult election, and the US economy remains in a fragile state so it would not be surprising if China took retaliatory measures designed to make a statement.  US Phase 4 talks have made limited progress and will resume today.  No agreement has been made on the extra unemployment aid that expired last month.  The lack of progress has led to the possibility of executive action to restore the eviction moratorium and suspend the payroll tax.  However, suspending the payroll tax appears to be a legal non-starter and would do nothing to help the unemployed who just lost the extra $600/week benefit.   The US Treasury announced that it expected to issue ~$950 billion in debt in Q3, which is roughly $270 billion higher than estimated back in May.  This estimated borrowing number includes additional borrowing in anticipation of future legislation being passed.  With the Republican plan seen as the floor and the Democratic plan seen as the ceiling, the risk is for more than expected debt to be raised.   The Reserve Bank of Australia kept its policy rate and 3-year AGB target unchanged as expected.  The bank also left its 2020 growth forecast unchanged (6% contraction) and revised down its 2021 forecast slightly in light of the shutdown in Victoria.  Overall, the statement skewed slightly dovish relative to the June and July ones.

If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447‑4133. Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!

Follow City National Bank on social media:

Non-deposit investment products: • Are not FDIC insured, • Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and • Are subject to investment risks, including possible loss of the principal invested. This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.

Unsubscribe from this list  |  Update email preferences This message has been sent to bank@banking.offers.report. Please do not reply to this email. To ensure the delivery of future emails, please add foreignexchange@emails.cnb.com to your email address book or safe sender list. Copyright ©2020 City National Bank – All Rights Reserved. 350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071 City National Bank is a subsidiary of Royal Bank of Canada. TERMS & CONDITIONS  |  PRIVACY STATEMENT NMLSR ID# 536994 | City National Bank Member FDIC