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Currency Market Analysis

Oct 16, 2019 | Currency Market Analysis

Global Themes

Brexit has sterling up, down and all around

The greenback rebounded from multi-week lows in choppy, Brexit-driven trade. Safer bets like the U.S., Japanese and Swiss currencies rose at the expense of the euro, sterling and commodity trio from Canada, Australia and New Zealand. No breakthrough Brexit deal despite talks going into the wee hours of the morning. U.K. and EU officials are expected to continue discussions ahead of tomorrow’s start of a two-day Brexit summit in Brussels. Failure to reach a deal is expected to set off a showdown in the U.K. Parliament this weekend, billed as ‘Super Saturday.’ That’s when the House of Commons would either vote on any deal that Prime Minister Boris Johnson clinches. But if a deal doesn’t materialize the British Parliament is expected to implement at law called the Benn Act that forces Mr. Johnson to ask the EU for another Brexit delay. U.S. retail sales will also be in focus today with potential implications for Fed policy, a key driver of the dollar.


The U.S. dollar turned negative as disappointing news on the economy-driving consumer offered evidence of economic weakness spreading to America’s chief growth engine. Retail sales fell by 0.3% in September compared to forecasts of a 0.3% increase. Core spending also underwhelmed with a flat reading. The data is consistent with third quarter growth slowing from the second quarter’s paltry 2% pace. Disappointing data on such a vital part of the economy will up the already elevated odds of a dollar-negative rate cut by the Fed later this month. 


Sterling was held hostage to Brexit headlines which proved a good thing at least for now. A headline this morning suggested that the Brexit parties had made progress toward a deal. Sterling as a result soared to new five-month highs. Sterling’s whipsaw action is likely to persist until markets gain some semblance of clarity over Brexit. A deal would come at the surprise to many but wield the potential to thrust sterling significantly higher. Should the talks fail to deliver a deal, sterling would be a risk of a renewed and potentially sharp slide.


Brexit caution and underwhelming news on Canadian inflation weighed on the loonie. Overall Canadian consumer prices rose at a 1.9% annual rate in September, below forecasts of a 2.1% increase. Less volatile core inflation also steadied at 1.9%, a whisker below the Bank of Canada’s 2% goal. Inflation holding close to central bankers’ bullseye won’t alter expectations for Canada to keep borrowing rates unchanged later this month. 


The euro was broadly flat against the dollar, keeping the single currency near the upper end of its range and its highest level in a month. The euro is largely riding shotgun to the pound which rallied anew this morning on reports of progress toward a Brexit agreement. Markets’ laser focus on Brexit helped to distract from downbeat news on euro zone inflation whose overall level was unexpectedly downgraded further below 1%, coming in at 0.8%. Scant inflation running far below the ECB’s near 2% goal will keep pressure on policymakers to deliver more euro-negative stimulus.

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