On Friday, GBP continued to lead the way in currency markets, supported by increased confidence that Johnson’s Brexit deal would win the support of the UK Parliament. The USD remained under pressure helping the NZD and AUD reach a one-month high. The US yield curve continued to steepen.
Brexit remained in the spotlight Friday, ahead of the planned UK Parliamentary vote on Johnson’s freshly negotiated Brexit deal with the EU. While the vote was seen to be a close call, various news sources reported increasing support for the deal throughout the day.
However, on Saturday’s special session, Boris Johnson suffered another humiliating defeat in the UK Parliament with his negotiated Withdrawal Agreement Bill not even put to a vote, following a win for the Letwin amendment – a motion tabled that withholds approval for Johnson’s Brexit deal until legislation implementing it has been passed (and thereby avoids the possibility of an accidental no-deal exit). This automatically triggered the Benn Act that forced Johnson to write to the EU to seek a three-month delay to Brexit (although any extension ends as soon as a deal is passed). We await the EU’s response, but there is little doubt that an extension request will be granted.
Johnson might have the last laugh though, with media reporting that he might just well have the numbers to support his bill, which could be voted on Tuesday. However, it also means that amendments to the bill could be introduced, suggesting that the form of Brexit might well be different from that which Johnson negotiated. This might include a “confirming referendum” to any deal to ensure it commands the support of the public.
The bottom line is that the Brexit circus has a few more acts to play out yet that will maintain the fog of uncertainty and GBP volatility. In our view, more positive scenarios for GBP have developed this past week and ultimately GBP can recover further.
A number of Bank of England MPC members were on the wires Friday helping to support GBP, offering positive tones following the UK/EU agreement on a possible new Brexit deal – all of them highlighting the likely increase in investment. Deputy Governor Ramsden reiterated the BoE’s previous guidance that a smooth exit from the EU would mean “limited and gradual” increases in interest rates are needed. Governor Carney said that the deal was good news. He added that it would make monetary policy “a little more interesting” but didn’t necessarily mean that the BoE would hike interest rates.
GBP closed near its high for the session, making another run towards 1.30, up 0.7% for the day and taking its rise for the week to 2.5%. The stronger GBP continued to have a positive spillover effect on EUR, seeing it close up 0.4% to 1.1170. This combination saw USD indices fall further, to their weakest level since July, with the DXY index down 0.3% for the day and 1% for the week.
In fact, the USD was down against all the majors, even if only slightly in some cases. A number of Fed speakers were on the speaking circuit and there was no overt pushback on market expectations that see another 25bps by the Fed well-priced. Vice-Chair Clarida reiterated the Fed’s view that the economy was in a good place but there are still “some evident risks”, and the FOMC “will proceed on a meeting-by-meeting basis”. The 2-year Treasury rate ended the day down 3bps to 1.57% while the 10-year rate was steady at 1.75%, continuing the trend towards yield curve steepening – the 18bps gap in the 2s10s curve the greatest since late-July and an encouraging sign for those who rate the yield curve as a preeminent signal of economic recession.
The NZD and AUD both gained by about 0.5% on Friday, reaching monthly highs in the process, closing the week around 0.6380 and 0.6855 respectively. There was no adverse effect from China’s data release, where Q2 GDP growth showed annual growth slowing to a fresh multi-decade low of 6.0% y/y, a touch below consensus. It wasn’t all bad news though, with industrial production for September picking up more strongly than expected.
CFTC data continued to show large net short speculative positions in the NZD, as at last Tuesday, at some 40k contracts. The more than 2% gain in the NZD from the mid-week low near 0.6240 might have reflected a closing of some of those positions. As the NZD has showed some signs of consolidation over the past couple of months, one might presume that traders are wary of sitting on large short NZD positions at the bottom of the range of the past four years. Potential US-China trade war de-escalation, a soft Brexit and a more positive US yield curve would be some fundamental reasons to have a less bearish view of the NZD at this juncture.
The economic calendar for the week ahead is very light and over coming days the spotlight will remain on Brexit.