Picture the scene:
A British convertible with its roof down visits a Fast Food Drive Thru in Brussels.
“Three chocolate milkshakes please”
The worker looks bored, disappointed and tired:
“There’s a sign back there. We’re out of chocolate shakes. We’ve got vanilla.”
The car looks surprised and put out.
“We’ve been working hard all day and deserve chocolate milkshakes. What are our options?
“Well you can have 3 vanilla milkshakes or will need to get out of the queue empty-handed. You might want to put the roof up though; it’s poring over there near the cliff edge and pretty wet in the sea so I hear.”
The occupants of the car discuss, can’t agree, so compromise:
“. We don’t want to drive off the edge of that cliff, obviously, although nor do we want control of the bakes, to leave the queue, or vanilla shakes. We’d like three chocolate milkshakes please?”
Is the worker bluffing?
Are the occupants of the car negotiating genius, one step away from Poker gods? Or are they confused basket-cases who would have been better-off with a sit-down Happy Meal?
…And there you have it: a summary of last Tuesday’s vote in one long drawn out muddled analogy. We don’t want a ‘No Deal’, don’t want the power to avoid a ‘No deal’ and now agree we want the deal with amendments to the Irish backstop, which we’ve been told we can’t have.
The pounds performance remains understandably tied to Westminster ‘ayes’ and ‘noes’. UK parliament refused to take a ‘No Deal’ off the table and the resulting comments and Tweets (the world we live in) from EU and European leaders had regret that a ‘No Deal’ outcome has become more possible. Sterling understandably dipped vs EUR, USD and JPY in the second half of the week from the optimism shown my traders in the first half and second half of last. All that said, it only gave back what it had gained the last fortnight, currently hovering around 1.14, 1.30 and 144 respectively.
Certainly that modest retracement fits with Morgan Stanley’s assessment that ‘No Deal’ is still only at 10% and to buy Cable (GBPUSD) on any dips to below 1.29. Whether these are complex calculations or finger-in-the-air stuff…no longer really matters.
Construction PMI has already disappointed today, dropping close to 50; i.e. contraction territory and the worst since April. Should Manufacturing also be feeling the Brexit heat tomorrow and Services falter, expect GBP under pressure. Nissan’s announcement that they’ll be building their new X-Trial model in Japan rather than Sunderland is another warning of business abandonment on Brexit. The UK car industry is already 80% down in the last 3 years. If you’re not a believer in these warnings, then thank you for reading Mr Gove.
The Bank of England rate decision and Inflation report on Thursday is extremely unlikely to hold any surprises. If anything new is implied, you’d expect it to be UK/Brexit/sterling negative.
GBP/EUR
Table of Contents
1 week: 1.13-1.15 ranges.
6 month: 1.18
12 month: 1.21
GBP/USD
1 week: 1.302-1.3150 ranges.
6 months: 1.35
12 month: 1.39
In the Eurozone Italy plunged into its 3rd technical recession (2 consecutive quarters of GDP retraction) in 8 years. It’s a very poor sign for a Populist government, who reacted by doing what all Populist governments do on the mainland: blame Germany and its struggling manufacturing industry. That it also blamed the US-China Trade War, when the French and Spanish economies showed solid performance and are susceptible to the same market forces, suggests the 0.2% drop may be for reasons closer to home. Indeed whilst Brexit distracts the politicians, traders know there is one VERY big elephant in the room. French and Irish banks are hugely exposed to Italian borrowing and credit health, and an excellent article today on Bloomberg gives excellent overview of the potential consequences. https://www.bloomberg.com/graphics/2019-italian-banks/
With the Eurozone PMIs of diminishing consequence for the euro and Spain’s unemployment today already increasing by 80.5k – the worst single month change since April 2014 and worse than estimates – I’d expect a small retests against the USD, GBP,CAD and JPY this week; But with far bigger storms on the horizon.
EUR/USD
6 month: 1.17
12 month: 1.21
For the US, Non-Farms Friday had a fantastic headline figure: 304K jobs added! Workforce participation also increased, however the last 2 months were revised down 70K and 90K respectively. Manufacturing jobs were at a 5 month low and unemployment surprising jumped to 4%; the worst since July. Conclusion: a mixed bag. USD has dipped below the key psychological 110 level vs. the Yen, And Wednesday evening’s (US time) Jarred Powell comment (FED chair) will likely see further support for the short-term shorting of that pair unless anything unexpectedly upbeat arising from the jobs figures and tomorrow’s US manufacturing health give traders reason to be more positive on rate-rise outlooks.
USD/JPY
Weekly: 109
6 month: 108
12 month: 107.50
The Canadian dollar looked good last week, testing 1.70 vs. sterling, 1.50 vs. euro (best this year) and breaking 1.31 vs. USD – a move not seen since early November. Oil at a 10 week high helped, as likely did the lack of alternative yielding-yet-stable currencies to invest in. employment figures on Friday and I’d expect a stabilising of gains, with any drop attributed to oil dropping from its peak.
The Australian dollar sentiment has been positive since December’s 0.5% inflation beat estimates and removed the immediate threat of a rate cut. The Aussie gave up plenty of ground in the second half of 2018, so a short-term retracement is understandable. There’s clearly optimism that the momentum isn’t dead and this week the RBA Statement on Tuesday evening (Australian time) will erase rate cut fears further, as will RBA Governor Lowe on Tuesday evening and the RBA’s Statement on Friday if their underlying messages follow suit. However, the 200 DMA (daily moving average) still has a very obviously downward trend. Geopolitical global risk hasn’t gone away and for exporters, the RBA are happy for AUD to remain weak and therefore cheap to help its exporters. Aussie bulls beware.
The Kiwi dollar saw similar gains vs USD. Strongest position since the first week of December and employment data on Wednesday evening (UK time) expected to see unemployment kept below 3.9% and thus remain the lowest since August 2008. Tracking the Aussie higher Vs. USD and now above 0.69, the kiwi was helped further by S&P affirming the NZ Government’s crediting rating at AA and upgrading the outlook from “stable” to “positive”.
GBP/AUD
Weekly: 1.8
6 months 1.83
12 months 1.86
USD/CAD
6 months: 1.29
12 months: 1.34
AUD/NZD
6 month: 1.08
12 months 1.10+
