Sterling Pounded on BoJo Brinkmanship

  • Fears of a hard Brexit are still alive and well; the dollar is getting some traction
  • There is some minor US data out today; Brazil COPOM minutes will be released
  • Ahead of the BOE decision Thursday, UK data continue to come in weak; Hungary is expected to keep rates steady at 0.90%
  • RBA minutes were released overnight

The dollar is broadly firmer against the majors as hard Brexit fears rise.  The euro and Swissie are outperforming, while sterling and Aussie are underperforming.  EM currencies are mixed.  KRW and CLP are outperforming, while TRY and RUB are underperforming.  MSCI Asia Pacific was up 0.9% on the day, with the Nikkei rising 0.5%.  MSCI EM is up 1.2% so far today, with the Shanghai Composite rising 1.3%.  Euro Stoxx 600 is down 0.8% near midday, while US futures are pointing to a lower open.  10-year UST yields are down 2 bp at 1.86%, while the 3-month to 10-year spread has fallen 2 bp to +31 bp.  Commodity prices are mostly higher, with Brent oil up 0.3%, copper up 0.1%, and gold up 0.2%.

Fears of a hard Brexit are still alive and well.  Prime Minister Johnson is pushing to guarantee a Brexit by end-2020 even if a new trade arrangement is not in place.  Under what was expected to be a negotiated Brexit by the January 31, the UK enjoy a transition period until end-2020 in which the current trading arrangement is maintained.  Given how long trade treaties take to negotiate, most observers believed that an extension beyond end-2020 would be requested.  Johnson is now saying the UK will not ask for an extension and is willing to crash out of the EU then. While much of this is brinksmanship on his part in order to secure a better deal, we’ve seen before that the EU has little patience for this strategy.  Stay tuned.

The dollar is getting some traction.  DXY is trading at its highest level since December 12 and has recouped over half of its post-FOMC losses. Part of this recovery is due to renewed Brexit tensions, but part of it is due to the improving US economic outlook, which in turn has helped push US rates higher.  The 10-year yield is trading near 1.85%, shy of last Friday’s high near 1.97% but still in an uptrend and at the high end of recent ranges.



There is some minor US data out today.  November IP (0.8% m/m expected), housing starts (2.3% m/m expected) and building permits (-2.9% m/m expected), and October JOLTS job openings (7009 expected) will be reported.  The FOMC media embargo has ended and so Kaplan and Rosengren speak.  Canada reports October manufacturing sales (0.1% mm expected).

The first December readings for the US manufacturing sector were solid.  Flash Markit manufacturing PMI fell a tick to 52.5 but was offset by services PMI rising a few ticks to 52.2.  This brought the composite PMI up to 52.2 from 52.0 in November.  Regional Fed manufacturing surveys for December started to trickle out, with Empire rising to 3.5 vs. 4.0 expected.  We would expect the US manufacturing sector to show some further improvement in early 2020 as trade tensions ratchet down.

Brazil COPOM minutes will be released.  It cut rates 50 bp last week and left the door open to further easing, so the minutes will be of interest to the markets.  The central bank then releases its quarterly inflation report Thursday.  Mid-December IPCA inflation will be reported Friday, which is expected to rise 3.71% y/y vs. 2.67% in mid-November.  If so, it would be the highest since mid-June but still in the bottom half of the 2.75-5.75% target range.  Next COPOM meeting is February 5 and much will depend on external conditions and the exchange rate.



Ahead of the BOE decision Thursday, UK data continue to come in weak.  Yesterday, it was weak preliminary December PMI readings. Today, it was jobs data and December CBI industrial trends.  November jobless claims rose 28.8k from a revised 26.4k in October, while October averaged weekly earnings growth slowed to 3.2% from a revised 3.7% in September.  Elsewhere, CBI reported total orders at -28 vs. -25 expected and -26 in November.  Export orders were particularly weak, falling to -35 from -22 in November.

UK businesses are likely to remain sidelined in terms of hiring and investment until the Brexit outlook becomes clearer.  The economy has weakened significantly in Q4 and we see little relief near-term now that Johnson has thrown a spanner in the works.  It seems likely that the BOE will remain on hold in 2020 as uncertainty is extended.  However, the risks are tilted towards a cut, not a hike.

Sterling has taken it on the chin.  Cable has given up all of its gains since Friday and is on track to test the election day low near $1.3050.  A break below that would open up a test of the November 22 low near $1.2825.  With the euro holding steady, the EUR/GBP cross is showing a similar dynamic to cable and a break above the .85090 high from December 12 would open up a test of the November 22 high near .86055.

National Bank of Hungary is expected to keep rates steady at 0.90%.  However, it is likely to add back some liquidity for Q1 that it removed earlier this year.  There is currently HUF300-500 bln of excess liquidity in Q4 and that is likely to be boosted to HUF400-600 bln.  CPI rose 3.4% y/y in November, well within the 2-4 target range.  However, with the economy slowing, we see steady rates in 2020 with potential for further excess liquidity conditions.



RBA minutes were released overnight.  The bank said that “Economic growth and the unemployment rate remained broadly consistent with the forecasts, but members agreed that it would be concerning if there were a deterioration in the outlook.”  It plans to “reassess” its outlook at the February meeting as the bank prepares updated forecasts, adding that “Members noted that the board had the ability to provide further stimulus to the economy, if required.”  At its last meeting, the RBA gave a fairly upbeat outlook for the economy and so these minutes were a bit more dovish than expected.  Next policy meeting is February 4 and WIRP suggests 55% odds of a cut then, up from 45% at the start of the week.  AUD is on track to test the December 10 low near .6800 and a break below that would set up a test of the November 29 low near .6755.