How SNB, Brexit and Trade Wars Affects FX
Daily FX Market Roundup 09.19.18
By Kathy Lien, Managing Director of FX Strategy for BK Asset Management
Brexit and trade headlines took currencies on a rollercoaster ride today. At the start of the NY session, GBP/USD dropped 90 pips in one minute on reports by the Times of London that UK Prime Minister May plans to reject the European Union’s improved Brexit offer. Earlier this week, the EU seemed to be willing to agree on UK rather than EC inspectors at the border but the UK refuses to accept the EU’s insistence on customs checks in the Irish sea if there isn’t a free trade agreement after Brexit. The Irish border has been the biggest hang-up in negotiations and the possible rejection of the EU’s offer reignited concerns about a no-deal Brexit and even a second referendum. For most of the month, we heard about possible concessions from the EU and reports of progress in Brexit talks but starting last week, the tone from the UK began to change. The UK government suggested that they’ve done all they can and the EU needs to stop revisiting previous positions.
Today, the country’s Treasury minister said that there could a second referendum if Chequers is rejected by Parliament and the UK’s Raab said they need the EU to move in their direction. Even EU head Juncker added that the EU and UK are far from a Brexit deal. Based on these comments, a deal could be further than initial thought, which puts sterling at risk of a correction. GBP/USD remains in play tomorrow with UK retail sales scheduled for release. While consumer and producer price growth were stronger than expected, Thursday’s report could fall short of expectations. Spending increased significantly last month so there’s potential for a pullback especially after the British Retail Consortium reported a decline. Technically, today’s high at 1.3215 is they key level to watch. If the pair rejects the 100-day SMA and fails at this level, we could see a steeper decline towards 1.30.
USD/CAD jumped above 1.30 today following reports that a trade deal between U.S. and Canada is unlikely this week. However instead of extending higher the pair u-turned quickly to end the day at its lows. At this stage it should surprise no one that the talks are taking longer than expected but Canada’s foreign minister Freeland is back in the U.S. for another round of talks which leaves hope that a deal can still be reached especially as Prime Minister Trudeau comes under pressure from local business leaders. We still believe that Canada has no choice but to reach an agreement with the U.S. and based on the recent performance of the loonie it appears that the broader market shares our views as well.
The Swiss National Bank has a monetary policy announcement tomorrow and the only reason why its on our radar is because EUR/CHF hit a 13 month low this month. The SNB’s view on the currency will have the greatest impact on EUR/CHF because for the past 4 meetings, they described the Franc as “highly valued.” EUR/CHF has been trading between 1.1460 and 1.1685 range throughout this time. Before that the SNB described EUR/CHF as “significantly overvalued” when the pair was trading between 1.0460 and 1.0960. At 1.13, EUR/CHF is currently right between those ranges so its not clear how much concern the central bank will express but without harsher criticism of currency strength, they stand to send EUR/CHF back to 1.10. We’ve already seen some investors reduce their long CHF exposure and we expect this to continue ahead of the meeting with EUR/CHF likely to trade back above 1.13. If the SNB shifts their tone and describes the currency as “significantly overvalued,” we will see a sharp recovery that could take EUR/CHF back to 1.14. If they keep their currency assessment unchanged however the pair could fall back down to 1.12.
The U.S. dollar ended the day lower against most of the major currencies despite a sharp rise in U.S. yields and better than expected U.S. data. The current account deficit narrowed in the second quarter while housing starts jumped 9.2%. These numbers easily offset the -5.7% drop in building permits. We need to look no further than risk appetite for an explanation as to why the dollar performed so poorly today. The strong performance of U.S. stocks along and the continued recovery in the Australian dollar tell us that no one is worried about the trade war. The U.S. imposed tariffs on $200B of Chinese goods and China responded with levies on about $60B of U.S. goods. Retaliation is not a step in the right direction but China imposed only a 5% and 10% penalty of U.S. imports, which is lower than the 5% to 25% levels previously proposed. To the market’s relief this is also the first time that Beijing did not match Washington’s tariffs dollar by dollar (because they can’t). The Bank of Japan also had a monetary policy announcement last night where they said the economy is expanding moderately despite escalating trade tensions. Their decision to leave policy unchanged was in line with expectations.
Short covering flows helped the Australian and New Zealand dollars settle the day as the best performing currencies. The New Zealand data however continues to weaken with consumer confidence falling to a 6 year low and the current account deficit widening. Yet NZD could still trade higher if tonight’s New Zealand GDP numbers strong. Consumer spending and trade activity improved in the second quarter so the risk is to the upside for this report.