Articles
6 December 2018

GBP: Risk premium still too low

Investors are still too complacent about the potential downside for sterling ahead of next week's Brexit vote. Meanwhile, the arrest of Huawei's CFO in Canada raises questions about the durability of the US-China trade truce

USD: More dollar strength

The pressure on risk assets continues, with the arrest of the Huawei's Chief Financial Officer in Canada (for extradition to the US) adding further question marks about the credibility and the durability of the short-term trade war truce struck between the US and China over the weekend. With the US 10-year Treasury yield below 2.90% and the ongoing flattening of the UST curve, the US dollar is set to benefit. Given the nature of the sell-off, Asia-linked G10 currencies (Australian dollar and New Zealand dollar) are set to underperform the rest of the G10 FX space. In the emerging market space, Asian FX is set to lag, closely followed by Latin America, as the associated decline in risk appetite is also spilling into commodity prices. The focus today turns to the start of the OPEC meeting, though hopes for more meaningful cuts in production (which would provide a floor to oil prices) have been fading in recent days. As per Crude oil: Crunch time for OPEC+, we believe that anything below a 1MMbbls/d cut will be viewed as bearish by the market.

GBP: Still not enough risk premium priced in

Highly divisive UK politics and a veil of uncertainty about the Brexit outcome should continue to weigh on the pound. We note that a fairly limited short-term risk premium is priced into the EUR/GBP (currently modestly above 1% vs 3-4% in late August this year – see GBP: Rocked by Brexit). This suggests more downside to GBP stemming from next week’s (likely unsuccessful) vote on the Brexit deal. EUR/GBP to move above 0.9000 in coming days.

EUR: Upside remains fairly limited

Upside to EUR/USD is fairly limited and we look for the cross to test 1.1300 as the wider risk-off environment and the flattening UST yield curve are both positive for the US dollar. In the Czech Republic, October retail sales, excluding cars, should be solidly above the average year-to-date growth rate, supported partially by the calendar bias. But any impact on the overbought Czech koruna should be limited. In Serbia, we expect the central bank to stay on hold, as the uptick in October inflation was minor and core CPI remains muted at 1.1%. Our economists look for a neutral communique pointing to an evenly distributed balance of risks, suggesting limited spillover into the Serbian dinar.

RUB: Above-consensus CPI to support rouble

In Russia, November CPI should accelerate further (ING 4.0%, consensus 3.8%). The steady -0.15% week-on-week inflation seen in the last three weeks suggests that even our above-consensus expectation of 3.9-4.0% year-on-year for November could be exceeded, as overall local prices are catching up with the rouble depreciation of 12-13% year-to-date and the recent pick up in gasoline prices. This would, in our view, increase the likelihood of a rate hike later this month, in turn supporting the rouble.


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).