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Currency Market Analysis

Oct 21, 2019 | Currency Market Analysis

Global Themes

On a knife edge

• Brexit vote to dominate markets tonight
• Mum’s the word as USD weakens
• Chinese growth hits 27 year low

Brexit vote to dominate markets tonight

All Brexit options remain on the table. After a weekend where we were supposed to get the final verdict on a deal or no deal outcome, we were left, ironically, with the guarantee of another extension. Prior to the final vote, the Letwin amendment was tabled before parliament and passed by a narrow 322-306 votes. The amendment dictates that PM Johnson has to ask the European Union for an extension to the October 31 deadline to prevent Britain crashing out of the EU should Johnson’s last ditch Brexit deal pitch fail.

Logic suggests this might be a sign that Boris doesn’t have the numbers to get his deal done, but the picture becomes murkier when several supporters of the Letwin Amendment (including Letwin himself) have indicated they will vote for the UK PM’s deal tonight, suggesting the motion is merely an insurance play should they lose the key vote. Only in British politics could things be so convoluted. We are expecting several more amendments to be tabled but provided the EU grant the UK some kind of provisional extension (if needed) we do think we will finally get the material vote on Johnson’s deal tonight. There’s every chance it could come down to a solitary vote, and Pound volatility is a given. Kiwi pairs will also be susceptible to such a binary outcome as well, with a rejection of the deal likely to dampen risk appetite.

Mum’s the word as USD weakens

Leaving Brexit shenanigans behind, NZD/USD hit a fresh 5 week high on Friday night, as Fed Vice President Richard Clarida stayed rather tight lipped ahead of their key end of month rate decision. In the last Fed speech before this week’s blackout period, Clarida reiterated that monetary policy is “not on a preset course” and that decisions would be made “meeting by meeting”. He noted slower growth in the second half of the year, and stressed that the Fed has a “special responsibility” to keep unemployment low and inflation expectations around 2%.

The market took this as a cue that the Fed will cut rates at the end of the month, with market pricing firming from 82% to 91% on that outcome following Clarida’s speech (source: CME Group’s Fedwatch tool). Certainly the Fed VP had the opportunity to roll back market expectations for a cut and didn’t do so. In fact if anything he seemed to be warning the market not to read anything into another cut. That’s like telling the toddler not to touch the candy. Either way it helped NZD/USD close 1% up for the week, and a solid 2% higher than its midweek lows.

Chinese growth hits 27 year low

Finally a note on Chinese GDP released on Friday afternoon, which sank to 6%, representing a 27 year low. A much stronger industrial production print offset some of the negativity, and while 6% is only something New Zealand can dream of, lofty growth rates in China have been largely responsible for driving the commodity boom and higher Antipodean currency prices over the last couple of decades. Further slowdown in China could risk lower ranges on AUD/USD and NZD/USD over the medium term.

Today we get local credit card numbers ahead of that key Brexit vote tonight. In Canada we also have their latest election where incumbent PM Justin Trudeau’s position is also on a knife edge. Some upside in NZD/CAD could be seen if this one becomes too close for an immediate call.

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