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Weekly View
David Morrison | 10/12/2018 09:03
After five days of intense debate, on Tuesday the UK Parliament will vote on the withdrawal bill negotiated between the United Kingdom and the European Union.
The EU has already voted to accept Theresa May’s Brexit bill - but now it’s decision time for the UK and Northern Ireland.
Looking at the odds currently being offered by bookmakers, the probability is that the Prime Minister will lose the vote. Paddy Power is offering odds of just 1 to 14 on a No vote while YES comes in at 11 to 2. So it would seem the only issue now is how many MPs come out against Mrs May’s proposal. A large majority will put her premiership at risk.
PaddyPower Odds
While a ‘’NO’’ vote is seen as a done deal, large speculators in the sterling-dollar futures market continue to reduce their short positions. In late September speculators were net short of 80,000 futures contracts while latest data shows only 39,000 net shorts. This tells us two things:
- Firstly, large speculators consider current levels as good areas to cover their shorts.
- And secondly, there’s room for further short selling after the vote.
One thing seems certain and that is we can expect a pick-up in volatility in sterling. Having said that, we’re unlikely to see the kind of wide intra-day ranges that came after the Brexit referandum in 2016, unless Mrs May surprises everyone and wins Tuesday’s vote.
Stock market volatility shot higher last week as we experienced huge swings in global indices. Trade tensions between US and China have escalated again after being dampened down in the immediate aftermath of G20. In addition, concerns over a slowdown in global economic activity has led US fixed income traders to price out some of the rate hikes forecast for 2019. However, the market still expects the Fed to raise rates next week by 25 basis points.
Yields vs Dollar
This chart shows the US 10 year yield in blue and Bloomberg Dollar Index in yellow. There has been a good correlation between these two since the beginning of year. However, we are now in a phase where rising bond prices and the corresponding decline in yields require US dollar funding that creates this temporary decoupling. If we see bonds reverse and once the uncertainty over Brexit has passed then we could see the Dollar Index sell off sharply to recouple with US yields.
On the economic calendar we have US PPI on Tuesday and CPI on Wednesday. We also have monetary policy meetings from the European Central Bank and Swiss National Bank on Thursday. Neither central bank is expected to move on rates, but traders expect the ECB’s Mario Draghi to announce the termination of the Asset Purchase Programme.
Have a great week!
Other Weekly Views
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Is The Worst Over For EURUSD ?
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Last week saw the release of yet more dismal economic data from Euro zone.
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Fed confirms dovish pivot
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Chinese growth slows
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China’s GDP growth continues to slow while there’s no breakthrough on trade talks with the US. Investors look ahead to monetary policy meetings from the Bank of Japan and European Central Bank
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Sterling steady ahead of vote
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Sterling has managed to hold on to last week's gains ahead of Tuesday's key Brexit vote. Meanwhile, gold is back in favour with investors
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Powell responds to market volatility
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US/China trade talks, strong payrolls and dovish comments from Fed Chairman Jerome Powell lifts equities and US Treasury yields while dollar slips
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Dollar strong as 2019 gets underway
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The first trading day of the New Year has seen the US dollar soar and equities decline. Meanwhile, gold seems to be back in favour with investors
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Key Week Kicks Off
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The US Federal Reserve meets on Wednesday and is expected to raise its Fed Funds rate by 25 basis points
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Busy Week Ahead
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On Saturday we heard that the US and China had managed to reach a tentative agreement over trade. As a result, President Trump has said that tariffs on Chinese imports to the US will stay at 10% for the next 90 days instead of being raised to 25% on January 1st as previously threatened
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Fed Speaks Markets React
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European and US equities were sharply higher early Monday. Investors were cheered by an apparent thaw in EU-Italian relations, a recovery in oil and hopes of a US/China trade breakthrough
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Stock indices bounce back
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European and US equities were sharply higher early Monday. Investors were cheered by an apparent thaw in EU-Italian relations, a recovery in oil and hopes of a US/China trade breakthrough
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Trump administration will struggle to push through further tax reductions
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Early last week the dollar came under selling pressure as traders expressed their uncertainty ahead of the US midterm elections. It continued to weaken after the Republicans increased their majority in the Senate, but lost control of the House of Representatives.
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US dollar lost ground as November began
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After a dismal performance in October, last week saw gobal equity markets rally sharply into the month-end.
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Economic Calendar
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On Wednesday the Bank of Japan kept its key interest rate unchanged at minus 10 basis points and its target for 10-year JGBs unchanged at zero. The Nikkei closed 2% higher while the yen was pretty much unchanged in the session.
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ECB Takes Centre Stage
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The US dollar continues to be in demand as investors look for safe-havens amid the carnage in global equity markets.
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