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Markets hope for a breakthrough in China/US trade talks.

By Jake Trask

Tomorrow sees the start date of debate in the House of Commons on UK PM, Theresa May's proposed Brexit withdrawal agreement ahead of next Tuesday's parliamentary vote on whether to accept it or not. With MPs returning to work yesterday after the Christmas recess there has been a flurry of news on the matter with arch-Brexiteer, Boris Johnson calling on MPs to vote down Mays plan, the government carrying out tests on what a no deal Brexit could mean for traffic at Dover and Brexit Secretary, Stephen Barclay denying reports that leaving the EU could be postponed amongst others. It’s looking likely that Mays plan will get voted down at the first attempt on Tuesday without some further assurances from the EU emerging re: the Irish backstop. Expect sterling volatility to return over the coming days after a relatively calm Christmas period. GBP/USD remains range bound at present with it currently sitting at 1.2765.

The dollar has regained some ground overnight reversing some of the sell-off seen on Friday. Comments from Fed Chair, Jay Powell in Atlanta that the bank would look to be “patient” re: rate rises throughout 2019 had seen the greenback sold off and stock markets jump in America. EUR/USD has fallen back to around the 1.1445 after looking like it may break through 1.15 and USD/JPY is back up to around the 109 handle after testing 108. Talks in Beijing are ongoing between US and Chinese officials in an effort to try and find an agreement between the world’s two largest economies over a future trading arrangement. Stock markets are up around the world so it appears there is hope of some progress being made. The only top-tier data from Monday came by way of an under-par ISM Non-Manufacturing PMI reading from the States with last month’s impressive 60.7 falling back to 57.6 providing further evidence that the US economy is starting to cool after a storming 2018.

Fears are building over the health of the German economy as the latest Factory Orders m/m fell short of target printing -1% when -0.2% was predicted. The German economy has been badly affected over recent months on the back of Trumps trade offensive with China and its knock on effect with the rest of the world. Third quarter growth fell into negative territory with -0.2% shown for the July to September period and Germanys DAX stock exchange has fallen around 20% over the past 12 months. Holders of the euro will be hoping that an agreement can be found between the two superpowers or we could see the EZ’s largest economy slip into recession for the first time since 2009. Thursday sees the release of the minutes from the European Central Banks last interest rate decision. Discussions over the timing of a rate hike will be the main area of focus. GBP/EUR continues to trade sideways currently sitting at 1.1160.

With little news emanating from Beijing over the trade talks between US and Chinese officials the proxy for the subject matter, the Aussie dollar, remains subdued. AUD/USD has been relatively calm this week after recovering from last week’s yen driven flash crash. Positive news re: progress on the talks will drive the Aussie higher. We should hopefully get some news today with talks scheduled to wrap up later this morning. Last night saw Australian trade balance numbers fall short with an AUD1.93B surplus seen for November. Tonight we have Building Approvals m/m with another contraction in the sector eyed. AUD/USD is at .7135 with GBP/AUD at 1.7910.

The rally in CAD, fueled by rising crude oil prices and some dollar weakness seems to have come to an end for the time being with USD/CAD holding steady around the 1.3280 mark. The loonie has seen a big move higher over the past few days with a break above 1.37 looking on the cards this time last week it has since gained around 4 cents. Today we have trade balance figures being posted with a deficit of CAD2.1B for November expected. This week’s big monetary policy decision comes tomorrow from the Bank of Canada with bank chief, Stephen Poloz expected to announce a hike in rates to 2% from 1.75%. GBP/CAD trades at 1.6960.

Like the Aussie, the Kiwi remains range bound against the dollar with markets awaiting news on the aforementioned China/US trade talks. There is no data of note from New Zealand this week so external factors will be the main driver of the local buck. GBP/NZD is currently at 1.8940.