Morning Brief – Tuesday 11th

Realistic and Possible:

Four consecutive days of Brexit sentiment certainly has the Pound supported, but it has me concerned. The fragility of the statements presents a serious risk to the Pound should the expectations that news snippets have nurtured be undermined. Markets are in a risk-off mood this morning with safe havens including the Japanese Yen and Swiss Franc losing considerable ground against their counterparts. Risk appetite increases despite the meeting between Chinese President Xi Jinping and Russian President Vladimir Putin today. Italian risk continues to be forgiven by investors, supporting the Euro. The Rand continues to gain a footing following serious devaluations last week.

• GBP:   Speaking in Slovenia, chief EU negotiator Michel Barnier claims a deal is possible within 6 – 8 weeks, with government blue-prints containing “lots of useful things”.

• EUR:   The Euro incurs volatility as investors position themselves ahead of Thursday’s European Central Bank interest rate decision.

• USD:   Defensive Dollar demand slumps amidst global risk-off strategy allowing cable to rise above 1.30.

• EM:    Another day of FX gains as emerging market equities recover mildly.

Pound Sterling:

October back in Sight?

Even pre-Chequers Brexit timetables and blueprints included a preliminary deal in October 2018 to allow for parliamentary and government ratification. Ask any investor or trader and they’d probably tell you this expectation was more optimistic than the British were in 1914 claiming the war would be over by Christmas. Immense value was restored to the Pound yesterday when Michel Barnier spoke publicly in Slovenia. His words claimed that a deal was possible in a number of weeks (implying an October completion).

The paradigm we now live within has meant that every piece of news is priced to the worth degree and adjusted back afterwards. Take any circumstance… Trade war: Mesmeric Dollar strength; Brexit: Crippled Sterling; Italian coalition budget negotiations: 77% 10-year bond yield spike; Trump Tweet about South Africa: 10% overnight devaluation. A consequence of this doomsday trading is that when good news unfurls from the ashes of the bloody phoenix, markets overreact to price out the Armageddon scenario. Given the loose series of Brexit headlines that have pushed Sterling to a monthly high there could be downside for Sterling. The appreciation thus far appears unsustainable when considered against the commitments the UK must make to realise the sanguine promises of the negotiator.

The Euro:

Treading on Egg Shells:

The Euro finds itself standing upon increasingly rocky ground, producing interesting trading conditions. The risk emanating from Italy appears to be subsiding with yields on domestic government debt continuing to fall (trading below 2% on the 5-year bond at market open this morning) and the price of credit default swaps falling (currently trading at around 225 basis points, 0.14% firmer on the day). Given the risk surrounding Italy investors are continuing to re-orientate their expectations around Thursday’s ECB interest rate decision. Murmurings, at least for now, are suggesting a dovish announcement from President Draghi.

The Dollar:

Trade in Focus:

It has been claimed that President Xi Jinping of China is considered by US President Trump as a friend and a respected counterpart. I’ve personally never seen it confirmed on the other side of the Pacific Ocean but I’ll take Donald’s word for it… However, bordering Russia is less of a friend of the United States, despite the affinity the incumbent President is accused of having for Mr Putin. Today’s meeting between Russia and China could be supposed to generate further antagonism between the US and China, exacerbating any propensity for punitive trade sanctions against the Republic.

Emerging Markets:

Rally and Repeat:

Another day, another modest step forward for the South African Rand. Presently trading 0.5% stronger on the day, USDZAR is struggling to find demand above a rate of 15.00 and 17.5 against the Euro. The Rand still trades at an enormous premium and its weakness is being sustained beneath key resistance levels, however, the emerging market currency moves closer to them with each day.

Discussion and Analysis by Charles Porter

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