News & Analysis


Yesterday in Brexit; close, but not quite there. Sterling rallied briefly on the news that key Eurosceptic members of the story party would vote in favour of May’s deal in a potential third meaningful vote on Friday. Boris Johnson, Iain Duncan-Smith and Jacob Rees-Mogg all aired their support for the deal after May offered to step down should the UK leave with a deal in place at the next deadline. By “delivering Brexit”, May’s job looks done as the beast that is Brexit takes another Prime Minister prematurely. However, the optimism was soon slashed after DUP leader Arlene Foster stated the coalition party couldn’t vote for a deal that “threatens to Union”. The final piece in the puzzle is absent, but negotiations with the Northern Irish party will continue this morning to get them onside. This could prove key to the success of MV3 and bring the rest of the Tory MPs on side against the threat of a softer Brexit or potentially no Brexit. However, the decisive issue doesn’t just taint the government after last night’s indicative votes, proposed by MPs after taking control of the business schedule, showed there was still no majority in Parliament for any exit mechanism. The Customs Union approach came the closest with Labour encompassing it into their party policy, while last weekend’s protestors will feel short changed after a second referendum vote fell 295-268.


EUR stomached minor declines again against USD yesterday and lost more than 1.5% as it weakened for the fourth time out of the last five trading sessions. European Central Bank President Mario Draghi appears to be losing confidence in medium-term inflation expectations faster than a teenager with no date and prom night quickly approaching. Yesterday he said the ECB’s inflation target has been “delayed rather than derailed”, which is the most explicit admission of the ECB president so far that short term low inflation pressures will trickle into the medium term inflation outlooks as well. The escape from negative interest rates now seems to be slipping further even further out of sight, with the market implied yield curve signalling negative rates to remain with us more than three years into the future.


“Chaos reigns, the greenback gains” appeared to be the adage of FX markets yesterday as Brexit remained in turmoil, the Reserve Bank of New Zealand took a sudden dovish turn and emerging markets like Turkey and South Africa are buried deep in problems of their own making. Therefore, it may be unsurprising that the greenback led the G10 currency board yesterday, together with the traditional haven currencies JPY and CHF. However, the fact the dollar managed to advance yesterday borders to the incredible given the fact that the dovish choir in the Federal Reserve camp managed to strengthen in volume yet again. This has resulted in a further drop in Fed funds futures, which now even imply a 30 basis points rate cut this year, while the US 10 year treasury yields dropped below the 2.40% for the first time since December 2017. In short: the appeal of the dollar as a safe haven in times of global unrests seems to prevail for now, whatever happens to domestic US macroeconomic and monetary conditions.


Yesterday’s build in crude oil inventories in the US saw oil sell-off 62 cents, bring the loonies 2-day rally to an end. Tightening US-CA yield spreads came to an end yesterday too, pulling any support for the Canadian dollar. Investors will be eyeing up January’s GDP release on Friday to gauge the current state of the Canadian economy.

FX Elsewhere

Emerging markets continue to be tainted with negative sentiment as the Turkish liquidity crisis continues. After the CBRT cancelled the 7-day repo rate, in an attempt to stem speculative attacks on the currency prior to local elections, risk appetite for other EM currencies fell. The South African rand continues to trade in negative territory ahead of the SARB meeting and Moody’s credit rating, while the Argentine peso hits all-time lows again amid inflation fears and political uncertainty ahead of this year’s elections.