Cable Craters on More Brexit Drama; US Midterms in Focus

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Market Drivers November 6, 2018
EZ Final PMI beats
DUP pours cold water on Brexit deal
Nikkei 1.14% Dax -0.36%
Oil $62/bbl
Gold $1233/oz.
Bitcoin $6459

Europe and Asia:
EUR EZ Final PMI 53.1 vs. 52.7
EUR EZ PPI 4.5% vs. 4.2%

North America:
USD Elections All Day
CAD Buildinng Permits 8:30

More Brexit drama in overnight trade today as DUP – the hard right Irish party – noted that “we may be heading for a no deal Brexit” referring to the impasse on the negotiations regarding the Irish border.

Cable instantly tumbled about 40 points in the wake of the headline but found support at the 1,3020 level. Although negotiations are clearly difficult, its important to understand that DUP is a fringe political party with a clear desire for a hard Brexit. Although they are a minority within PM May’s government their political power is limited and the general market view is that some sort of a soft Brexit will be negotiated given the very high economic stakes of the alternative,

Today’s Cabinet meetings are sure to produce more headlines as the day proceeds but the customs union worked out and the financial sector fungibility agreed to, the major points of Brexit negotiations appear to have been settled. There is, of course, a chance that hard-liners could succeed at scuttling the deal, but the market is betting that cooler heads will prevail.

In Europe, there was a dash of good news for a change as final EZ PMI readings were revised upward to 53.1 from 52.7. The final reading was still the slowest growth in two years but it suggested that the region was decelerating rather than tumbling into an outright contraction. EURUSD popped to 1.1425 but dropped below the figure on broad yen cross selling ahead of the US elections today.

The midterm election will be the key driver of trade in the market today with pundits suggesting that results are too close to call. The conventional wisdom is that the Democrats will take back the House while Republicans will hold the Senate, but with turnout and voter suppression tactics the big unknown the two extreme scenarios – Dems taking Congress of Republicans keeping full control are just as likely. As our colleague Kathy Lien noted yesterday, “Here’s how things could play out for FX – we know that dollar bulls like the Republican-controlled Congress because it supports Trump’s policies. So if the Republicans maintain control of both parts of the government, the dollar will soar. USD/JPY could hit 114 and EUR/USD could break 1.1350. If Congress is split, with the Democrats controlling the House and Republicans the Senate, the prospect of legislative gridlock that would make it difficult for policies such as the President’s middle-class tax cut to pass is negative for the U.S. dollar. But in this case, the reaction should be short-lived. The most bearish scenario for the dollar would be if the Democrats win both the House and Senate, in which case, we should see a very aggressive slide in the USD that takes EUR/USD to 1.15 and USD/JPY to 112.“

Boris Schlossberg
Managing Director

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