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Brexit and Global equity markets


On Monday the US dollar trades flat this after U.S. Vice President Mike Pence said last Saturday that the U.S. isn’t in a rush to end the trade war and won’t change course until China changes its ways. However, China’s President Xi Jinping said that implementing tariffs and breaking up supply chains is “short-sighted.” According to a different strategist, the upcoming G20 meeting between Xi and Trump will provide more certainty in the FX market, but a suspension of further tariffs in exchange for more negotiations is the most likely scenario. In general, the US dollar has been trending lower in the last week after several Fed officials had a less hawkish tone.

The equity market pullback does underscore the uncertain outlook for what the Fed will do when they meet on December 19, probably marking their fourth rate increase this year. According to The Wall Street Journal, Fed officials are divided over how many times the central bank will raise rates next year. Projections released after the Fed’s meeting in September showed officials are roughly equally split over whether the economy will require two, three, or four rate raises next year. This morning, the core durable goods orders (monthly) were at 0.1% when the forecast was 0.4%; this is causing negative pressure on the US dollar.

The US dollar index moved within a wide range of 0.86%, ending 0.68% higher in yesterday’s session. Yesterday was another negative day with US equities lower again (SPX -1.82%, Dow -2.21%, Nasdaq -1.7%). However, the story is different this morning: the US index is weaker due to US stocks looking poised to regain ground as market participants counterbalanced the late selloff.

The Loonie started a rally last Thursday from 1.3250 to 1.3127. A stronger crude price and a “risk on” market sentiment helped the Loonie. According to Reuters, Goldman Sachs expects a significant fall in the US dollar next year as U.S. economic growth slows to be more in line with the global average. According to the investment bank, the Canadian Dollar is likely to rise steadily against its U.S. rival over the coming quarters, adding that the Bank of Canada will continue to raise interest rates in the year ahead and that it might move at a faster pace than the Fed.

The Loonie is recovering its losses on Wednesday, after the US dollar gained strength in a “risk off” environment, acting as a safe haven yesterday. The S&P/TSX and S&P/TSX 60 fell 1.29 percent and 1.37 percent respectively. The second main driver of the weak Loonie was crude, which had a 7 percent fall yesterday. The USD/CAD pair moved to a new 5-month high at 1.3318. However, this morning the USD/CAD pair is falling 0.2 percent (stronger Loonie) due to a better mood in equity markets and a moderate bounce of 2.6 percent in crude. The Loonie was also under pressure following Bank of Canada Senior Deputy Governor Carolyn Wilkins’ comments that some market players consider dovish. Wilkins said, “We will need to improve our methods to account for considerations such as distributional effects and financial stability. We also must ensure that the right supporting policy tools and measures are available in extraordinary circumstances.”

The Canadian Liberal government is allocating billions to help Canadian corporations compete with the US and prop up struggling news organizations. Finance Minister Bill Morneau publicized Canada's strong economic performance, but warned that global uncertainty, unpredictable oil prices, lingering trade disputes and deep tax cuts brought in by US President Donald Trump are all posing severe challenges. The USD/CAD started its fall from 1.3306, trading at this moment at 1.3214, a fall of 0.7 percent (stronger Loonie).

FThe euro started the week hitting a fresh two-week high on Monday as selling pressure continued on the greenback. A weaker than expected US NAHB housing market index print fueled a sell-off in U.S. stocks, weighing on the dollar, too. Meanwhile, the situation in Italy simmers away and continues to pose a risk to the single currency, this despite recent comments from the ECB’s Nowotny who said this morning at contagion from Italy’s budget plans has been very limited.

There was less volatility in the euro yes, much like many other major currency pairs. This came despite news that the European Commission had rejected Italy’s revised budget and that the EC was considering disciplinary actions against the country for excessive debt.

The pound steadied last Friday, with less negative Brexit related headlines circling. And, although it was the worst performing major currency last week it’s showing some early signs of fight back this morning as investors seemingly brush aside the pessimistic weekend newspaper headlines, including one such headline from The Sun that there are currently 42 conservative MP letters to push for a vote of no-confidence in the PM, with 6 more letters required to trigger any vote.

The one news story that did see the pound wobble though was reports that Spains Government may veto any Brexit deal should the future of Gibraltar not be clarified in the proposed withdrawal agreement. GBP/USD fell to as low as 1.2775 however we are now back above the 1.28 handle ahead of Theresa Mays trip to Brussels to meet EU officials. The meeting with the President of the European Commission, Jean-Claude Juncker and others is expected to finalise the proposal ahead of it being ratified at a meeting of EU heads of state on Sunday. This will mean a big hurdle has been overcome however anyone expecting a jump in sterling crosses should bear in mind the agreement then has to be voted on in UK parliament which is currently looking a 50/50 shot at best.

The Australian Dollar descended from two and a half month highs on Monday as fresh developments from over the last weekend surfaced that the US and China trade conflict was not anywhere near close to being resolved. Apparently Chinese officials were unhappy over wording of the joint statement that is usually releases at the end of the APEX summit. The AUD/USD pair broke through psychological support of 0.7300 and touched a low of 0.7277 during the North America session.

However, the Australian Dollar has managed to recoup some losses witnessed on Tuesday and clawed back towards the high 72’s during Wednesday’s day of trade. With a recovery in US equities and big leaps in European stocks the Aussie bounced from a low of 0.7202 to touch an eventual high of 0.7277 during the North American session. The pair has settled back down a shade since currently changing hands at 0.7263.

With very little in the way of local economic data the Australian Dollar struggled to mount any significant directional momentum through trade on Thursday moving between a low of 0.7234 and a high of 0.7268 vs the Greenback. Trading was also thin with the US celebrating their annual Thanksgiving holiday however Brexit news still kept investors on the edge of their seats.

A draft Brexit deal has been agreed upon between the UK and the European Union. EU members are expected to finalise the deal on Sunday at a summit, but the main hurdle will be to pass the UK parliaments early December. AUD/GBP dropped on the back of this currently sitting at 0.5626 at the time of writing.

Another strong day for the Kiwi last Friday as the local unit close the week a touch under 0.6880, a level we have not seen since June. The weekly moves represent a 2% gain against the greenback with the currency now sitting up 7% from its early October lows heading into the rest of the year.

Friday’s session saw dovish commentary from Fed Chair Clarida, engendering broad based USD weakness and a downtick in US yields, aiding the NZD and AUD to continue their weekly upward trend. This weakness was compounded by an improvement in global risk sentiment following positive signs emanating out of the US-China Trade dispute, with President Trump expressing optimism regarding a pending deal as well as indicating he may not proceed with his threats to impose additional tariffs on the world’s second largest economy. The outlook for the Kiwi for the remainder of the year will remain sensitive to how these talks develop.

The New Zealand dollar slipped back below 0.68 through trade on Tuesday as risk appetite soured and milk prices fell. Having touched intraday highs at 0.6865 the kiwi turned sharply lower as market demand for risk deteriorated in the wake of an extended equity sell off. Concerns surrounding persistent trade tensions and the broader impact on US domestic growth, when coupled with reduced expectations for US fiscal stimulus have dampened demand for global stocks and prompted a marked sell off (nine percent) since September.

In line with expectations, markets were subdued on Thursday due to the thanksgiving holiday in the USA. The NZD traded in a 30-pip range overnight, oscillating between 0.6790 to 0.6850 against a slightly weaker USD. The kiwi was the worst performer on the day as it failed to capitalise on a 0.2% drop in the USD index and the GBP surged after encouraging Brexit headlines. AUD/NZD also traded flat, firming around the 1.0650 handle.

With the Kiwi continuing to take its cues from developments in global risk sentiment and global equity prices, Kiwi traders will be keeping a close eye on political uncertainty in the UK as well as the dynamic US-China trade war situation.