FX Update: GBP concern notches higher.
Summary: Sterling concern on the Brexit talks status lurched a few notches higher as the UK refuses to sit down for renewed talks until the EU makes concessions. Elsewhere, dovish jawboning overnight from an RBA official as the market shifting its expectations lower for the rate cut at the November 3 RBA meeting. Elsewhere, today is the deadline for US House Speaker Pelosi on pre-election US stimulus talks.
Trading focus:
Sterling concern notches higher on stand-off over further talks
The situation for sterling has taken a sudden turn that is finally seeing the market a bit less complacent. The prior focus was on the supposed promise brought about by changes to the controversial Internal Market Bill, key clauses of which the EU found unacceptable and would violate the Brexit withdrawal agreement. But now we have a more serious twist as the UK side refuses to sit down for new talks with the EU unless the latter makes key concession. Sterling is feeling the heat and could price in further concern here to the downside if the stand-off continues and prevents the resumption of talks. Looking over at GBPUSD, the move is still rather modest relative to a chunkier move in EURGBP, suggesting that the sterling downside thus far is still quite modest, so there is far more pain to price into sterling if the UK is willing to dig in.
Chart: EURGBP
EURGBP has jumped to attention., but the market still looks rather complacent relative to the potential risks if the UK digs in and is willing to take the situation to the wire without concession from its side. To threaten 0.9000 again, we’ll first need for talks to resume because the EU has made a sufficiently large concession to permit re-engagement. Hard to believe that the UK side will blink first. The upside potential is considerable in range terms, but may prove capped untill/unless the market is sure that a no deal is in the cards.
Aussie bashed further on more RBA jawboning
The Aussie sell-off had stalled a bit yesterday and the currency was only dragged a bit lower later in the session on an ugly late session in US equities before more RBA jawboning overnight dragged the currency a bit lower still. The RBA’s Kent claimed in an interview that there is further room to “compress” rates and said he wouldn’t be surprised if the shortest rates dipped below zero at some point. This has the market pricing nearly zero rates at the November RBA meeting (implied rate at 4.4 bps – so some seeing a cut from the current 0.25% to 0.10% while others lean for a full ZIRP.) Were the Chinese yuan not setting nearly daily highs against the US dollar, the AUD would surely be lower – it is definitely a factor in the mix.
US stimulus deadline supposedly up today.
Not much to add on the US stimulus front save for the fact that a definitive headline either way may be on the way and move markets considerably over the next 12-18 hours (today is House Speaker Pelosi’s deadline for a deal if something to be passed before the election). The most confusing aspect is perhaps less whether House Speaker Pelosi and Treasury Secretary Mnuchin can come to terms, but more whether Senate Republicans are willing to sign for a larger deal Trump seems willing to do as they may be burning bridges to Trump in anticipation of a thumping for their party at the election. A no-go on stimulus ´would likely support the USD and JPY and weaken risk sentiment.
Euro resilience despite ugly Covid-19 news flow.
The firm euro today is a tough one to wrap our heads around unless it is the news of the massive interest in the first proper join EU bond issue, which was said to be massively over-subscribed today. On the negative side, Covid-19 numbers in Europe are terrible as we await the flash PMI numbers for October on Friday. New virus-linked restrictions include a total shutdown in Ireland at the highest Level 5 severity, with people essentially told to shelter in place. German Bund yields have been driven to their lowest level in recent days since the worst week around the March Covid-19 linked market meltdown.
John Hardy
Head of FX Strategy
Disclaimer
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Trading focus:
Sterling concern notches higher on stand-off over further talks
The situation for sterling has taken a sudden turn that is finally seeing the market a bit less complacent. The prior focus was on the supposed promise brought about by changes to the controversial Internal Market Bill, key clauses of which the EU found unacceptable and would violate the Brexit withdrawal agreement. But now we have a more serious twist as the UK side refuses to sit down for new talks with the EU unless the latter makes key concession. Sterling is feeling the heat and could price in further concern here to the downside if the stand-off continues and prevents the resumption of talks. Looking over at GBPUSD, the move is still rather modest relative to a chunkier move in EURGBP, suggesting that the sterling downside thus far is still quite modest, so there is far more pain to price into sterling if the UK is willing to dig in.
Chart: EURGBP
EURGBP has jumped to attention., but the market still looks rather complacent relative to the potential risks if the UK digs in and is willing to take the situation to the wire without concession from its side. To threaten 0.9000 again, we’ll first need for talks to resume because the EU has made a sufficiently large concession to permit re-engagement. Hard to believe that the UK side will blink first. The upside potential is considerable in range terms, but may prove capped untill/unless the market is sure that a no deal is in the cards.
Aussie bashed further on more RBA jawboning
The Aussie sell-off had stalled a bit yesterday and the currency was only dragged a bit lower later in the session on an ugly late session in US equities before more RBA jawboning overnight dragged the currency a bit lower still. The RBA’s Kent claimed in an interview that there is further room to “compress” rates and said he wouldn’t be surprised if the shortest rates dipped below zero at some point. This has the market pricing nearly zero rates at the November RBA meeting (implied rate at 4.4 bps – so some seeing a cut from the current 0.25% to 0.10% while others lean for a full ZIRP.) Were the Chinese yuan not setting nearly daily highs against the US dollar, the AUD would surely be lower – it is definitely a factor in the mix.
US stimulus deadline supposedly up today.
Not much to add on the US stimulus front save for the fact that a definitive headline either way may be on the way and move markets considerably over the next 12-18 hours (today is House Speaker Pelosi’s deadline for a deal if something to be passed before the election). The most confusing aspect is perhaps less whether House Speaker Pelosi and Treasury Secretary Mnuchin can come to terms, but more whether Senate Republicans are willing to sign for a larger deal Trump seems willing to do as they may be burning bridges to Trump in anticipation of a thumping for their party at the election. A no-go on stimulus ´would likely support the USD and JPY and weaken risk sentiment.
Euro resilience despite ugly Covid-19 news flow.
The firm euro today is a tough one to wrap our heads around unless it is the news of the massive interest in the first proper join EU bond issue, which was said to be massively over-subscribed today. On the negative side, Covid-19 numbers in Europe are terrible as we await the flash PMI numbers for October on Friday. New virus-linked restrictions include a total shutdown in Ireland at the highest Level 5 severity, with people essentially told to shelter in place. German Bund yields have been driven to their lowest level in recent days since the worst week around the March Covid-19 linked market meltdown.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
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