- Sterling is the big mover after the UK parliament soundly rejected May’s Brexit plan yesterday
- The UK parliament will vote whether nor not to go for a hard Brexit, which is likely to fail
- US data have not been helpful for the dollar
- Japan reported weak core machine orders for January
- The HKMA defended the HKD peg for a second day; Mexico January IP is expected to contract -2.0% y/y
The dollar is mixed against the majors. Sterling and Stockie are outperforming, while the dollar bloc is underperforming. EM currencies are mixed too. INR and RON are outperforming, while TRY and KRW are underperforming. MSCI Asia Pacific was down 0.5%, with the Nikkei falling 1%. MSCI EM is down 0.2% so far today, with the Shanghai Composite falling 1.1%. Euro Stoxx 600 is up 0.1% near midday, while US futures are pointing to a higher open. 10-year UST yields are up 2 bp at 2.62%. Commodity prices are mostly higher, with Brent oil up 0.7%, copper flat, and gold up 0.5%.
Sterling is the big mover after the UK parliament soundly rejected May’s Brexit plan yesterday by a 391-242 vote. While the margin is a bit better than the record 230-vote margin of defeat in January, it’s still not good news for May. There is now talk that May’s government may not survive and early elections will be called. Stay tuned.
Today, UK parliament will vote whether nor not to go for a hard Brexit, which is likely to fail. If so, it would then vote tomorrow on asking for a delay beyond the Article 50 deadline of March 29. Sterling has recovered as the base case of an extension is the most palatable choice at the moment. However, we believe this knee-jerk buying will eventually give in to greater pessimism as a deal remains virtually impossible.
Meanwhile, US data have not been helpful for the dollar. Yesterday, it was slightly lower than expected CPI readings. Today, it’s PPI’s turn. The headline reading is seen dropping a tick to 1.9% y/y, while core PPI is seen steady at 2.6% y/y. January durable goods orders will also be reported and are expected to fall -0.4% m/m.
The Fed’s Brainard spoke yesterday but hewed mainly to the topic of community banking. After her, there are no more Fed speakers as the media embargo goes into effect ahead of the March 20 FOMC meeting. A March pause is clearly warranted, but the market is pricing in no hikes whatsoever this year.
Japan reported weak core machine orders for January. Rather than contacting the expected -1.5% m/m, orders instead plunged -5.4% m/m. Weak data ahead of Friday’s BOJ meeting suggest no change to its current dovish stance. While Kuroda has talked of adding more stimulus, we think it would prefer to wait until the impact of the consumption tax hike this fall is felt.
The HKMA defended the HKD peg for a second day. By buying HKD at the weak end of the trading band, the HKMA is tightening liquidity and driving local interest rates higher. This in turn should take some pressure off of HKD. Reports suggest it bought $500 mln worth today after buying $192 mln last week. We see no risk to the peg.
Mexico January IP is expected to contract -2.0% y/y vs. -2.5% in December. Inflation has fallen back within the 2-4% target range, but the vulnerable peso is likely to prevent the central bank from cutting rates anytime soon. Next policy meeting is March 28, no change is expected then.