Articles
11 October 2019

FX Daily: Bar for any Brexit deal still high

The pound's response to optimistic statements from Prime Ministers Boris Johnson and Leo Varadkar underscores the heightened sensitivity of sterling to Brexit news. But we're not getting excited 

USD: Optimism running high but don’t get carried away

Risk assets got a breather following optimistic comments from President Trump on the progress of trade negotiations. Still, we shouldn't get carried away given the division between the two sides on topics like intellectual property rights as well as Trump’s desire to strike a complete deal, rather than a partial one. Should an agreement be reached, the next week could be very positive for emerging markets FX. Any US-China currency deal would probably echo language from the G20, with promises to avoid competitive devaluations whilst still compelling China to be more transparent on FX intervention.

EUR: Lifted by the trade talks but not outperforming

While EUR/USD has been lifted by positive sentiment about trade talks, the currency has still lagged most of its G10 peers and is now back close to the 1.1000 level. This partly reflects the euro's lower beta, slowing eurozone growth and rising divisions within the European Central Bank. In the central and eastern European space, the key beneficiary from the short-term reversal in sentiment has been the Hungarian forint, in large part due to the large short positioning by foreign investors. In Poland, parliamentary elections this weekend are likely to deliver a widely expected PiS victory and be neutral for the zloty.

GBP: Bar for any deal still high

The pound's price action yesterday in response to statements from Prime Ministers Boris Johnson and Leo Varadkar underscored the heightened sensitivity of sterling to Brexit headline news, in light of meaningful short positioning. Still, we view the division between the EU and UK on the question of the Irish customs union as too deep for a deal to be agreed by the end of the month. Rather, the less divisive stance and the hints of optimism more likely reflect each side's aim to avoid the blame for failed talks. We still think the most likely outcome is no agreement by 31 October, an Article 50 extension and early elections taking place by year end. We view early election as a negative for sterling, particularly when little risk premium is priced into the currency. Today, the focus is on EU Chief Negotiator Michel Barnier meeting with UK officials.

CAD: Downside risk from labour data

Although trade tensions will be the key driver for the Canadian dollar today, the focus will temporarily shift onto September employment numbers. A drop in part-time jobs is expected to push the headline figure around zero, but unemployment and wage growth should be little changed from August. The risk is that markets may overreact to a possible negative headline number and push CAD lower. We expect some signs of weakening in the labour market and a Bank of Canada rate cut by year-end.


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