Finally, some progress on Brexit?
March 11, 2019
Now don’t hold your breath, but there is a slim possibility Brexit could be wrapped up in the next few days. But who are we kidding? Not the market it seems, which remains adamant that this week’s indicative votes will lead to a minor extension of roughly 2 months in Article 50. According to many of the political periodicals, May has refrained from making a last-ditch run to Brussels today after talks with the continent broke down. This leaves the original timeline intact, which begins with the meaningful vote 2.0 tomorrow evening. This is largely expected to be defeated in the House of Commons, with many expecting the margin of defeat around the 150 mark. Then, the process swiftly moves to a vote on the UK leaving the EU with no-deal. Given the widespread distaste in Parliament for a no-deal Brexit, as expressed via previous voting intentions on amendments, Wednesday’s vote on the UK leaving the EU with no-deal in place will likely follow the fate of the meaningful vote. Should this vote also be rejected, the process will then lead to the final vote. The final vote will likely occur on Thursday. Should this vote on an article 50 extension, pass – which logically it should given that no-deal has been ruled out prior to this vote – May will probably have another 2 months to seek concessions on the Irish backstop before resetting the painstakingly slow process once again. This remains the narrative the pound is currently trading off of, but any deviations from the path to an extension will likely cause big fluctuations in sterling’s price. Brexit will likely take centre stage this week, but in the background, the data calendar remains plentiful. Manufacturing Production figures for January are released on Tuesday, which should show how deep the Manufacturing slowdown runs, and GDP for January is released at the same time.
In a “dead cat bounce” move the euro traded up against most major currencies on Friday after reaching the lowest point against the US dollar on Thursday after the European Central Bank spread its dovish wings. Manufacturing data for the Eurozone was very mixed on Friday, with January German Factory orders contracting by another steep 2.6%, while January French and Italian showed strong performances at +1.3% and +1.7% respectively. Details of this morning’s German Industrial Production figure revealed activity in the German manufacturing sector fell by a cumulative 2.7% in the second half of 2018, providing a low base for the Q1 and Q2 figures, and thus highlighting the potential chance of a rebound. Today and tomorrow European Finance Ministers meet in Brussels for Eurogroup and ECOFIN meetings, with Final Consumer Price Index figures on Friday being the main data release.
The data calendar remains rim-filled for the US dollar this week, which may extend last week’s dollar rally, which had the broad dollar DXY index hit its 21-month high on Thursday, despite many independent analysts expecting the dollar to under perform in 2019. Retail sales are released this afternoon at 12:30 GMT, with consumer and producer inflation indices on Tuesday and Wednesday respectively, and trade data is released on Thursday. Meanwhile, this afternoon it is highly expected that the Whitehouse will release an optimistic 2020 budget proposal. Preliminary readings state that the document suggests the US economy will continue to expand at the same pace as it did in 2018. With last year’s growth driven predominantly by fiscal stimulus, if the projections are to be trusted, it may hint at possible growth-positive policies in the near future.
After the loonie’s strong performance on Thursday, CAD took a breather on Friday and remained in the middle of the G10 currency cohort, despite a solid jobs report. The Canadian Economy added 55.9K jobs in February, while the Industrial Capacity Utilisation Rate continued to reside close to 11-year highs, both indicating increasing tightness in the economy. Especially the strong labour market is the lone shining star in the economy that showed a sudden standstill in Q4. This may prove a guiding light, however, for the Bank of Canada to follow and stick to its belief the economy will improve later in the year, which should warrant future rate hikes. This morning, the loonie may begin to kick off once again with other resource-sensitive currencies after Saudi Arabia promises to extend deep oil output cuts into April.