Macron pokes Salvini to react

December 11, 2018


Sterling took a hammering yesterday, smashing through downside resistance levels and ending the day firmly bottom of the G10 currency board. The currency was initially sent into free fall midmorning, after it was leaked that Theresa May will be delaying the ‘meaningful vote’ on the EU Withdrawal Agreement, despite having reiterated several times over recent weeks that it would proceed as planned. The ensuing uncertainty sent sterling to its lowest point in 18-months against the dollar. May then took to the House of Commons at 15:30, where her statement conceded that she would have lost the vote, and thus she would return to Brussels to seek ‘further reassurances’ that the UK could leave the backstop mechanism unilaterally. Donald Tusk, the President of the European Council, has already ruled out reopening the draft Withdrawal Treaty for further negotiations, leaving May in a precarious position. The buzzword for sterling traders is uncertainty as the Brexit process could divert down a multitude of avenues as the doomsday clock ticks down further. If May’s current timeline is respected, the end-date for a meaningful vote is January 21st. It is our belief that the likeliest avenue is that May will strike minor concessions with the EU over the backstop mechanism that are not legally binding in a ploy to force marginal voters to back her deal in the New Year, but she must be wary of the impending pressure from the rest of Parliament in the meantime.


The euro kept its head down in the middle of the G10 currency board yesterday, although its advances against sterling were significant. In an attempt to win back popular support amidst continuing unrest in France, President Emmanuel Macron handed out early Christmas gifts to his constituents such as an end of year bonus, and a €100 state-funded increase in the minimum wage. However, the European Union may not join in the celebrative festive conga as this spending spree will send the French budget deficit far north of what European budget rules allow. The reaction of the Italian neighbours on this unpacking of gifts is uncertain at the moment; on one hand they may feel a pang of jealousy of the fact that France can spend without being reigned in, while at the same time their gift may be that they now have an ally in their revolt against EU budget rules, which they deem too stringent. The single currency meanwhile is uncertain how to react. These measures can be a fiscal boost that stimulates the Eurozone’s second-biggest economy, while the increased French deficit can be a threat to Eurozone’s financial stability as well. German ZEW Economic Sentiment is out today at 10:00 BST but the main driver of today’s price action may well be headlines from Rome.


The greenback did well yesterday on a day that had the strong scent of “eau de risk off” hanging around FX markets, with other safe haven currencies such as the Swiss franc also outperforming. Today, the Wall Street Journal reports that the US and China have started the latest round of trade talks with US trade representative Robert Lighthizer and Treasury Secretary Steven Mnuchin calling Vice Premier Liu He. Little will likely come of these talks if Donald Trump is to be believed. The US President recently took personal control over the development of US-Sino relations citing that he was the only one that could negotiate a favourable trade deal as he has a “personal relationship” with President Xi. Today, producer measures of inflation are released at 13:30 with the consumer counterpart released tomorrow for the dollar.


WTI shed another 3% yesterday and is trading only slightly above the pivotal $50 a barrel mark at the moment, which the loonie seemed to take rather personal as it came under pressure in the absence of relevant data coming out. Ultimately the Canadian dollar fell half a percentage point against its US counterpart whilst crude markets try to adjust to the recent OPEC production cuts.

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