The end of the beginning

Today's news headlines:

  • ‘Canada's Trudeau retains power in election but will have minority government’. Justin Trudeau’s liberals held on to power in Canada, but have been reduced to a minority government and will now rely on the support of the New Democratic Party to push through legislation. Canada’s economy has been on a general upswing this year, and the Canadian Dollar has been the best performing G10 currency, gaining more than 4% against the US Dollar. (Reuters)
  • ‘Trump says China signals trade talks on target for November deal’. TheUS-China trade negotiations appear to be running smoothly, and an initial deal may be agreed in time to be signed at a meeting next month in Chile. Trump claims that China has started purchasing US agriculture products but wants more concessions on intellectual property, financial services, and currency manipulation. (Bloomberg)

Careful measurement

When you watch the Olympic track and field events like pole vault or high jump, there’s a sense of precision about it. Market speculation regarding the latest episode of the Brexit saga feels strikingly similar right now. Every market pundit has their respective measuring tape out trying to figure out where Sterling might head given tonight’s rather binary outcome (pass or fail of the withdrawal agreement).

In most cases, forecasting political events is a fool’s errand. Looking back to an interview with one of the main UK bet makers after the EU referendum result was announced, they’d forecast an overwhelming remain outcome and the interviewer, clearly intent on taking them to task, questioned the validity of their forecasting. The representative of the betting firm responded rather happily that their job isn’t to forecast events, it’s to make money! There’s a cautionary tale in there somewhere, but let’s skip over that for a moment...

Given the serial forecasting of Brexit outcomes, we sense that this is a qualitatively different event than the unprecedented EU referendum vote. This is partly to do with the endless Brexit debate and, therefore, a broader market cognisance of the range of potential outcomes. Since this is a short-term measurement – a few days or a week – the fundamental argument we put forward last week about diminished UK economic fundamentals also bears less relevance. 

In that light, a market view that attempts to quantify a short-term Pound move (Spot was approximately 1.2980) looks at market pricing:

  • The cost of a Nov 1st option contract against Sterling appreciation (vs USD) suggests the market must trade beyond 1.3140 in order to break even on the contract and therefore defines a probable level of resistance to GBP appreciation.
     
  • The cost of a Nov 1st option contract against Sterling depreciation (vs USD) suggests that the market must trade below 1.2800 in order to breakeven on the contract and therefore defines a probable level of support against GBP depreciation.

Bottom line: It isn’t to say the market has a crystal ball, but it certainly gives a sense of where market insiders see the lie of major levels over the short-term. It also highlights the incremental nature of Brexit itself and reminds us that this isn’t the ‘one and done’ fix most people have been led to believe. Bloomberg’s Jon Faro expressed it aptly when he said this isn’t the beginning of the end, but rather, the end of the beginning. 

GBP/USD

Yesterday was dominated by Sterling’s failure to post a significant break past the 1.30 handle against the Greenback. The initial move higher was due to optimism that Boris Johnson has enough support to get his Brexit deal through Parliament, with the pair topping out at a five-and-a-half-month high. Cable remains in bullish territory, atop the 50, 100, and 200-day moving averages.

GBP/EUR

The Pound’s rally continued yesterday as the Sterling trade-weighted index reached its highest level since May 13th. The pair topped out just shy of 1.1660, but a Brexit deal could see a move towards or above March highs around the 1.18 mark.

EUR/USD

Yesterday mostly comprised a steady move lower in the pair, eventually finding some resistance at the 1.1140 mark. Reports that the US and China are getting closer to a trade deal provided a boost to the Greenback, and this led to downward pressure on the pair. Key resistance remains around the 1.1137 100-day moving average.