The pound was the main loser among the G10 currencies, coming under strong selling interest following reports that UK PM Johnson wants the UK to stop being subject to EU laws by the end of next year. Elsewhere, investors’ morale stayed supported as a result of the official confirmation that the US and China have reached a “phase one” deal. The risk-linked Aussie failed to capitalize though, as the RBA minutes showed that officials agreed that it is important to reassess the economic outlook at the February meeting.
The pound tumbled against all the other G10 currencies on Monday and during the Asian morning Tuesday. It lost the most ground against NZD, EUR, CHF and SEK in that order, while it lost the least ground against JPY.
The British currency came under strong selling interest following reports that UK PM Johnson revised the Withdrawal Bill to include a legal text that would require the UK to stop being subject to EU laws by the end of 2020, even if no trade arrangements have been put in place by then. Remember that following the election outcome, we noted that even if the Brexit deal is sealed before the January 31st deadline, there would still be an element of uncertainty in the new year, as the UK will have to negotiate a new relationship with the EU, including trade.
It seems that Johnson’s hard line raised concerns on that front earlier than we thought though, and kept on the table the prospect of the UK leaving the EU on a disorderly manner next year. Bearing in mind the Tories’ majority in Parliament, the pound may gain some more on the prospect of the Withdrawal agreement being approved in the House of Commons, but given that this is already largely priced in, judging by the latest uptrend in the pound, we remain reluctant to trust a long lasting recovery. Focus will quickly turn to the transition period and the new negotiations, where new conflicts may give amble reasons for GBP-bulls to start locking gains.
As for today though, GBP traders may pay some attention to the UK employment data for October, ahead of tomorrow’s CPIs and Thursday’s BoE monetary policy decision. The unemployment rate is forecast to have ticked back up to 3.9% from 3.8%, while average weekly earnings (both including and excluding bonuses) are anticipated to have slowed +3.4% yoy from 3.6%.
At its previous meeting, the BoE kept interest rates unchanged, but two members voted in favor of a rate cut. In the statement accompanying the decision, officials noted that if global growth fails to stabilize or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation. Despite Brexit uncertainty receding somewhat after the Conservatives won last week’s election, latest data, including yesterday’s preliminary PMIs, suggests that the door to a rate cut is not closed yet, and a soft employment report will add to that view.
Following the election rally on Thursday, which was stopped near the 1.7785 zone, GBP/CAD entered a downside corrective mode. That continued yesterday as well, with the pair hitting support near the 1.7445 barrier. Overall, the rate continues to trade above the uptrend line, above which the rate has been mostly trading since October 14th, and thus we would consider the near-term outlook to still be somewhat positive.
The current retreat may continue for a while more, perhaps towards the 1.7355 barrier, or the aforementioned uptrend line. The bulls may take charge from there and drive the battle back above the 1.7445 area. Something like that may allow the recovery to continue towards the 1.7570 hurdle, the break of which could set the stage towards yesterday’s high of 1.7650.
Looking at our short-term oscillators, we see that the RSI lies below 50 and points down, while the MACD, although positive, stands below its trigger line, pointing south as well. Both indicators suggest that the rate has run out of upside momentum and support the case for some further correction.
However, we would start considering a bearish reversal if we see a clear dip below Thursday’s low of 1.7210. This could initially pave the way towards the low of November 29th, at around 1.7120, the break of which could extend the decline towards the 1.7020 territory, marked by the low of November 27th.
Elsewhere, major EU and US indices traded in the green, with the positive sentiment rolling into the Asian session today. Both Japan’s Nikkei 225 and China’s Shanghai Composite gained 0.47% and 1.27% respectively. The positive investor morale was the result of the official confirmation that the US and China have reached a “phase one” deal, with details of the agreement coming to light. China has pledged to purchases of an average of USD 40bn worth of agricultural products per year, to strengthen legal protections for intellectual property, and to refrain from competitive devaluation. The US canceled the tariffs that were scheduled to go into effect on Sunday, and agreed to cut by half the tariff rate imposed on September 1st. The deal is anticipated to be signed at the turn of the year, in January, with the talks around a “phase two” accord, expected to start thereafter. As for our view, it remains the same as last week. The progress in this trade saga may keep risk sentiment supported for a while, but the riddle is not fully resolved. A final accord is not sealed yet and thus, we still cannot rule out any conflicts in the process towards achieving that.
Back to the currencies, the Aussie was found virtually unchanged against its US counterpart, despite the upbeat risk appetite. What may have stopped the currency from drifting north may have been the minutes of the prior RBA gathering. Although the message we got from the meeting statement was that officials are more comfortable staying on the sidelines than investors have previously believed, the minutes unveiled that the Board agreed that it is important to reassess the economic outlook at the February meeting. This prompted market participants to bring forth the timing of when they expect the Bank to cut again, assigning nearly a 90% chance for that to happen in April. Focus now turns to Australia’s employment data, due out on Thursday, where a disappointment is likely to bring the cut timing further forth.
AUD/USD traded higher during the European morning Monday, but hit resistance near 0.6897 and then, it reversed and slid, falling below the low of December 13th, at around 0.6865. The pair continues to trade above the upside support line drawn from the low of November 29th, but we see decent chances for the current correction to continue for a while more before the next positive leg.
The rate now looks to be headed towards the 0.6855 barrier, where a break may extend the slide towards the aforementioned upside line. The bulls may take charge from there and push back above the 0.6865 barrier. This could carry more bullish extensions and perhaps set the stage for yesterday’s high, at around 0.6897.
The RSI stands below 50, pointing down, while the MACD lies below its trigger line and appears ready to obtain a negative sign soon. These indicators enhance our view for some further retreat before, and if, the bulls decide to jump back into the action.
In order to start examining whether the bears have gained the upper hand, we would like to see a clear dip below 0.6837. Such a break would also bring the rate below the upside support line taken from the low of November 29th, and may initially pave the way towards the 0.6815 zone. Another dip, below 0.6815, could allow the bears to push towards the low of December 10th, at around 0.6800.
Apart from the UK employment report, we also get the nation’s CBI industrial trends orders index for December, which is expected to have ticked up to -25 from -26. Eurozone’s trade balance for October is due to be released as well, with the bloc’s surplus expected to have declined somewhat.
From the US, we get building permits and housing starts for November, as well as industrial and manufacturing production for the month. Housing starts are forecast to have increased somewhat, while building permits are expected to have declined slightly. Both industrial and manufacturing production are anticipated to have rebounded +0.8% mom and +0.7% mom, after sliding -0.8% and -0.6% respectively.
With regards to the energy market, we get the API (American Petroleum Institute) weekly report on crude oil inventories, but as it is always the case, no forecast is available.
As for tonight, during the Asian morning, we have New Zealand’s current account balance for Q3 and Japan’s trade balance for November.
We also have two speakers on today’s agenda: BoE Governor Mark Carney and Boston Fed President Eric Rosengren.
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