Choler on Display

There once was a large group of nations
Whose common goal was trade relations
But then as time passed
More rules they amassed
Which caused, for the Brits, complications

So three years ago, the UK
Decided to go its own way
Then Europe was miffed
Lamenting the rift
And put their choler on display

Along then came Boris the blond
Who’s tried to move Britain beyond
The uncertain ways
Of Brexit delays
But Europe’s now scared to respond

Alas, we are back to Brexit as the key story this morning. In a nutshell; the EU indicated they would offer a three-month extension, to January 31, 2020 but has not confirmed that; Boris called for an election to be held on December 12 in order to consolidate what he perceives to be his current power, but Labour leader Jeremy Corbyn insists that, though he wants to have an election, he will not do so until it is guaranteed there is no hard Brexit. Boris’s argument is that he has a deal that has been approved in principal by Parliament, so there should be no hard Brexit. However, Corbyn seems to realize that an election before Brexit is likely to lead to a significant Tory victory, so he won’t allow it. Meanwhile, the jellyfish in Brussels can’t make up their collective mind as to how long the extension should be and are claiming they ‘don’t want to get involved in UK politics’! Are they kidding? They have been involved in UK politics since the vote in June 2016. I tell you, the next decision they make will be their first. At any rate, we are now in a catch-22 where the EU doesn’t want to decide on the length of an extension until the situation in London is clearer, while Labour will prevent an election until they know the situation in Brussels.

All this has been somewhat negative for the pound, which saw quite a bit of volatility in yesterday’s session, falling a bit more than 1.0% during the NY morning as this saga started to play out, although it rebounded and recouped about half of those losses by the end of the day. This morning, price action has been quite choppy, but the range has been much smaller. As I type, the pound is lower by just 0.1%, but it has traded both sides of its trading range today, 1.2825-1.2860 four times. My advice is if you have to trade cable right now, leaving an order at your preferred level is the best practice.

In the end, while the market has priced in a slightly higher probability of a no-deal Brexit, I continue to firmly believe that the outcome will be the current deal will be passed and the pound will be set to trade substantially higher, with a medium term target of 1.35.

Yesterday was also Signor Draghi’s final meeting as ECB President and he kept to the script. He exhorted Eurozone members, who could afford to do so, to increase fiscal stimulus. He said the current monetary policy stance was appropriate and would remain in place until inflation was stable at the ECB’s target of ‘just below 2.0%’, and he insisted there was plenty more the ECB can do if necessary. But now it is Madame Lagarde’s problem going forward, as she will be installed as ECB president one week from today. And the euro? Well it has been pretty dull for the past week, trading in a tight range as it consolidates its 2.5% gains since the beginning of the month. We continue to get pretty lousy Eurozone data, with today’s survey data showing Consumer Confidence continuing to decline while the IFO Business data remained unchanged at its lowest level in more than ten years. There has been some effort to spin this as positive, but that’s a hard case to make.

On the trade front, there has been no real news, although China appears to be relenting with regard to pork imports as some 60% of their swine herd has been decimated by African swine fever and pork prices on the mainland have exploded higher. And remember, the US is not imposing tariffs on their own pork, it is China that is doing so for political reasons. Thus, if the domestic politics outweighs the trade politics, you can be sure there will be no tariffs on pork! So far, it still seems like President’s Trump and Xi are on track to sign a phase 1 deal next month at the APEC conference in Chile, but that is a long way away.

Elsewhere in the FX market, it is dullsville. I cannot find a single currency that has moved even 0.4% vs. the dollar, with most plus or minus 10bps or less from yesterday’s closing levels. Treasury prices are little changed as are equity markets in Europe and US futures. In other words, there is not a lot ongoing right now.

Looking at the data story, yesterday’s Durable Goods data was a bit disappointing, but not horrifying. This morning we are awaiting Michigan Sentiment (exp 96.0) but that hardly seems likely to move markets. For now, given the lack of Fedspeak, earnings data and its impact on equity markets are likely to be the biggest influencers of spot FX. That is, of course, unless we hear something unexpected from London, Brussels or Washington. However, it is shaping up as a day of consolidation ahead of next week’s FOMC and BOJ meetings, as well as the pending decision by the EU on the length of any Brexit delay. Enjoy the quiet while it lasts!

Good luck and good weekend
Adf