Possible Brexit Scenarios

UK Parliament is scheduled to hold its Brexit vote tomorrow. The outcome is expected sometime between 7-10 PM London time, and is likely to result in a rejection of May’s plan. What’s unclear is what happens next. Here, we try to put together some possible scenarios. For the most part, the scenarios would seem to favor UK assets for anything other than a no-deal Brexit.

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Drivers for the Week Ahead

  • Congress did not meet over the weekend and so the partial shutdown continues
  • Investors are starting to mark down US growth forecasts for Q4 and Q1
  • US reports December PPI Tuesday and then retail sales Wednesday
  • This is another week with a heavy speaking schedule for Fed officials
  • Weak China December trade data is adding to risk-off sentiment
  • UK Parliament is schedule to hold its Brexit vote Tuesday
  • UK, Japan, and Canada report CPI data this week
  • Central banks of Turkey, South Africa, and Indonesia meet

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EM Preview for the Week Ahead

EM FX ended the week on a soft note after rallying most of the week on the dovish shift in the Fed’s messaging. Until US rates adjust back to pricing in no US recession, it will be hard for the dollar to maintain much traction and so this EM bounce can continue. Yet other risks to EM remain in place, including slower growth in China and globally.

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FX Quarterly Outlook for First Quarter 2019

In the latest FX Quarterly, our strategists provide their views on major events across developed and emerging markets in Q1 2019.

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What Has Changed in EM

  • US-China relations appear to be thawing
  • People’s Bank of China cut reserve requirements by one percentage point
  • Bank of Thailand discussed lowering its inflation target
  • Turkish tanks have reportedly been deployed on the Syrian border.
  • Mexico Finance Ministry confirmed that it spent about $1.23 bln to hedge its 2019 oil revenues

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Dollar Limps into the Weekend

  • President Trump appears to be moving closer to invoking an emergency and tapping unused disaster relief funds to build his wall
  • Yet such drastic solutions would not bode well for the upcoming debt limit debate
  • Press reports suggest that the Article 50 Brexit date will be extended beyond March 29; it was quickly denied
  • During the North American session, the US reports December CPI
  • UK reported November trade, GDP, and IP; Italy reported weak November IP
  • Australia reported November retail sales
  • Brazil reported December IPCA consumer inflation

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Brazil Euphoria Getting Overdone

Market euphoria over new Brazilian President Bolsonaro remains strong. Yet the economy remains weak and the new government is still untested. We think market optimism on Brazil is due for a reset, like what was seen with Mexico and AMLO.

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Dollar Narrowly Mixed as Shutdown Drags On

  • The dovish choir at the Fed is getting quite loud; the FOMC minutes delivered a rare surprise
  • Fitch warned of a possible cut to the AAA rating for the US
  • Reports suggest President Trump walked out of a meeting with Democratic congressional leaders yesterday
  • UK Prime Minister May is weakened ahead of the next week’s Brexit vote
  • The US-China trade talks ended with a positive tone, but China is not giving US anything that it hasn’t promised before
  • China reported softer than expected inflation readings for December
  • Peru central bank is expected to keep rates steady at 2.75%

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Dollar Rangebound as Markets Await Fresh Drivers

  • Last night’s prime time address by President Trump contained little of substance
  • US-China trade talks in Beijing reportedly ended on a positive note
  • US rates markets are starting to normalize; FOMC minutes will be released
  • UK parliamentary debate begins today ahead of the planned January 15 vote
  • Bank of Canada is expected to keep rates steady at 1.75%
  • National Bank of Poland is expected to keep rates steady at 1.5%; Mexico reports December CPI

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