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Brexit and US-China trade war

By OFX

The Canadian Dollar is a commodity-linked currency and it is linked to fluctuations in global risk appetite, which in turn is impacted by China’s economic situation; however, it is less impacted than currencies such as the Australian dollar.

Last week the Canada took a turn for the worst after a Chinese court sentenced a Canadian man to death for attempting to smuggle drugs out of China. The verdict hastily handed down on Robert Schellenberg comes against the backdrop of Canada’s arrest in December of Meng Wanzhou, a top executive of Chinese technology giant Huawei at the request of the US.

The Canadian Loonie failed to gain the upper hand due to weak crude oil price action in the overnight trading session with cautious investor sentiment from European markets.

The prospect of a more permanent truce in the US-China trade war followed a report in the Wall Street Journal claiming US Treasury Secretary Steven Mnuchin was considering scaling back tariffs on Chinese imports which helped push up Wall Street Stocks and Oil.

The US government shutdown is now the longest in history as Trump still refuses to re-open until the Democrats approve the $4.5bn funding he needs for his US-Mexico Border wall. Polls show that the shutdown is starting to take a toll on Trump’s voters more so than the democrats as both sides dig in for a battle they can ill afford to lose.

Despite rising optimism surrounding US-China trade ties providing a much needed relief to global equities, higher tariffs and the March 1st deadline are still in place. US and China senior officials are scheduled to meet in Washington on 30-31 January. Trade negotiations will remain difficult, and as the deadline approaches, the market will probably demand more convincing evidence that a deal is likely.

Early in the week, E.U ministers stated they could accept a delay in Britain’s departure from the Bloc, but with conditions attached to extending Article 50 as May narrowly survived a Vote of No Confidence. The British Pound was the best performer in the last 5 days; it had an increase of 1%, 2.1% and 2.2% versus the USD, EUR and JPY respectively.

Draghi's ECB presentation last week suggested a shift in attitude as he not only highlighted downside risks but admitted that the Eurozone might be facing a prolonged downturn (but not quite a recession). With the ECB still needing a very expansionary policy, guidance on rates may not change significantly at next week's meeting. Investors are starting to speculate the ECB may well have missed their window of opportunity to raise rates, the probability of a rate hike by year end sits around 50%, it was 76% at the start of January.

Tory Eurosceptics are threatening to abstain or vote against the government if Theresa May pursues a softer Brexit with the support of Labour. A former cabinet member added that if such a deal was pursued, which includes endorsing a permanent customs union with the EU, there would be a hard core of MP’s who would wreak havoc.

After the rejection of her Brexit deal last week, Theresa May’s will present her Plan B to the UK Parliament on Monday. Risks of Article 50 being extended are looking more likely and according to weekend headlines, senior Labour representatives are trying to convince the party to support a fresh Brexit referendum. A new poll suggested voters would rather stay in the EU over accepting PM May’s Brexit deal.

The AUD has so far climbed 2.2% in January, compared with the 10% drop in 2018. The drag from China comes just as Australia’s property market is in the grip of its worst downturn for 35 years as household debt continues to pile up.

Leading indicators released early in January are pointing to a further slowdown in the Chinese economy, keep an eye on Q4 GDP data to be released today at 1pm Sydney time. It is likely that the PBoC will take more aggressive, front loaded policy responses to mitigate a weakening Chinese economy with the likelihood of more record high liquidity injections to come in the short-term.

Keep an eye on NZD CPI release on Wednesday, the kiwi had a couple of rough sessions last week and a soft CPI print could potentially put downward pressure on CPI expectations for the AUD. Both currencies tend to move in tandem, weak CPI readings will probably raise speculation around potential rate cuts by AU/NZ Central Banks in February.