In FX – So Many Questions So Few Answers

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Market Drivers December 13, 2019
Johnson wins big but Cable cant hold 1.3500
Deal or no Deal?
Nikkei 2.55% Dax 1.25%
UST 10Y 1.89%
Oil $59/bbl
Gold $1471/oz
BTCUSD $7244

Europe and Asia:
Johnson wins big

North America:
USD Retail Sales 8:30

Boris Johnson swept to a historic victory in Parliament that assured him a working majority to implement Brexit. Cable soared by three big figures taking out the 1.3500 level but by US morning the pair gave some of the gains back trading below 1.3400.

Meanwhile in North America risk flows exploded yesterday after Trump administration said that it had an agreement in principle on a phase one trade deal with China. Yet the Chinese side has been silent.

In both cases, the euphoria may have gotten the better of markets for now as Mr. Johnson will now have to address the hard business of spinning out of the European Union while Mr. Trump will need to come up with actual details of his deal.

For Johnson, the challenge will be to take the UK out of the EU while preserving a customs union. Anything short of that will destroy the UK economy regardless of the wide-eyed optimism of the bulls. The UK is a services economy that produces very little in terms of products that anyone wants to buy. Its primary strength is in the creative and financial industries which will need full and unfettered access to the Continent in order to survive.

Despite Mr. Johnson’s often buffoonish persona, we believe he is shrewd enough to realize that fact and now with a working majority in Parliament may be able to ignore the more extremist parts of his party in order to negotiate a workable deal with EU. Simply put that would involve throwing the DUP under the bus and abandoning the idea of a hard border in Northern Ireland and agreeing to a be bound by a host of EU regulations in order to ensure a free flow of goods from the Continent to keep the UK economy running.

Cable trade over the next few months will be driven by the pace and progress of the negotiations on that front which means that volatility in the pair is not finished.

In North America, the enthusiasm over the trade deal may be premature. So far the Chinese have confirmed nothing and wildly overstated figure of 50Billion agricultural buy which is bigger than the total US agricultural exports appear to be a verbal agreement rather than a hard written order.

The announcement yesterday appears to have been nothing more than a face-saving gesture to delay tariffs which would have been suicidal for US retailers ahead of the holiday rush. Still, the tariff delay may be all that the market wants to hear and will view any scarps of concessions by the Chinese as simply gravy. Global investors simply want to the war of attrition on trade to end and that could be enough to keep the risk rally going.

Boris Schlossberg
Managing Director

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