Global Themes

Sterling losses not fully priced in?
- Brexit-bruised Sterling holds on
- CAD sways with BOC and OPEC
- Fresh frictions renew risk-off sentiment
- EUR/USD slumped near $1.13

GBP

Brexit-bruised Sterling holds on
Once again, Sterling bounced between $1.27 and $1.28 against the US Dollar yesterday, trapped and lacking directional conviction as investors cautiously position themselves ahead of next week’s crucial parliamentary vote. JP Morgan doubled its estimated probability of Brexit falling through, from 20% to 40%, sending the pound scaling higher against its peers. Sterling gains were capped though after a surprisingly poor UK services PMI revealed Britain’s all-important services industry is at risk of contracting. The fall to 50.4 in November, from 52.2 in October, is the weakest reading since just after the referendum vote in 2016 and shows how Brexit uncertainty is weighing on consumer and business confidence.

GBP/USD still lurks near year lows and the possibility of an acceleration lower towards $1.25 could soon develop should the currency pair close a trading day below the key $1.27 level. GBP/EUR remains wedged within the familiar €1.12-€1.14 range, but again the pair has been loitering at the lower end of this range for a while now, suggesting the risk of a sharp breakout move beckons.

Meanwhile, results from the latest Reuters poll of economists show that the majority believe Sterling will fall 2.75% from current levels if Parliament vote against the Brexit deal next Tuesday. With this in mind, there is a risk GBP/USD could soon be trading well below $1.25 and GBP/EUR sub-€1.10.

CAD

CAD sways with BOC and OPEC
Yesterday, the Bank of Canada (BOC) left interest rates unchanged at 1.75% as widely expected. However, amid the bleaker global economic outlook and the volatility in oil prices, the BOC’s underlying tone was less hawkish than its previous statement in October. There were also hints that the central bank might downgrade its 2019 GDP growth forecast, which may reduce the likelihood of the bank raising rates early next year. As a result, the US Dollar pounced on the weaker CAD, propelling USD/CAD towards the June 2017 high around C$1.34. A telling sign of CAD weakness is the move in GBP/CAD this week as despite the broadly weaker British Pound, GBP/CAD has spiked around 2% to retake the C$1.70 handle. BOC Governor Stephen Poloz is scheduled to speak about the BOC’s policy decision at 1:30pm today.

In an attempt to prevent oil prices falling further, the Organisation of the Petroleum Exporting Countries (OPEC), Russia and other oil producers meet in Vienna today. Although facing pressure from US President Donald Trump not to reduce production, the nations are hoping to curb output to help lift prices, which have slumped circa 30% since October.

An oil exporting nation like Canada has witnessed its currency fall in value alongside oil prices. Therefore, if OPEC agree on production cuts and oil prices do recover, the CAD could gather some much needed support.

USA / China

Fresh frictions renew risk-off sentiment
After a few days of risk-on sentiment thanks to the trade truce inspired market confidence, tensions between the US and China are once again threatening to escalate. The shock arrest of a top executive of Chinese tech giant Huawei Technologies has angered authorities in Beijing, raising fears of escalating tensions between the world’s two largest economic powerhouses. Investor flight into safer and less risky assets has predominantly benefited the Japanese Yen but also supported the safe haven and more liquid US Dollar. One of the biggest losers has been the AUD, which often deteriorates in such risk-off market conditions.

China’s Yuan has come under significant selling pressure this year for a number of reasons, with the US-China trade row dominating. The fears of fresh frictions erupting could exacerbate the Yuan’s decline, which is already feeling the downside pressure since the news.

EUR / USD

EUR/USD slumped near $1.13
Much like GBP/USD, the EUR/USD currency pair has been caught in a trap between two key levels for some time now. Recently bouncing between the $1.13 and $1.14 handles, the Euro has struggled to even pull away from the $1.1350 area this week. EUR/USD is sliding back towards the $1.13 threshold this morning and if the pair cracks this floor, it could open the trap door to test fresh 16-month lows around $1.12.

Pressure on the Italian government to submit its new 2019 budget plan continues to weigh on the Euro alongside the ongoing Brexit-related uncertainties.




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