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Global Market Watch - 10th December 2018

It’s time to take another bite of the almighty Brexit sandwich on Tuesday. Parliament’s meaningful vote on Brexit is scheduled to take place on Tuesday evening about 8:30 pm, after 6 possible amendments to it have been voted on. Depending on how many votes the government is defeated by, we could see huge volatility in sterling. There are many permutations to what could actually happen, including the vote being postponed and MP's abstaining. So how should the market make sense of the vote? In a nutshell, any move or result that sees Theresa May heavily defeated sees sterling fall. A small defeat will see sterling probably stay in recent ranges, whilst a defeat that produces moves towards a second referendum sees sterling bounce hard. The pivotal rate for GBPUSD is still 1.2660. Although we have a host of data out this week, including GDP for release today and average earnings tomorrow, they will be secondary to Brexit – yet again.

There are many reasons for the euro to move at the moment. The ECB meets this week and ends its QE programme, so this could see the euro strengthen. The dollar has been weak at times, as the US equity markets falls and US yields fall, which could again prompt a stronger euro. Sterling of course has Brexit issues, again something that could encourage euro buyers, but it is worth noting that the euro is not making new highs against the pound. Unfortunately, President Macron is under pressure already, with a public approval rating of 18% just 18 months into his Presidency. Although Italy and the EU look to probably be agreeing over the Italian budget, they are taking their time to do so. If you add in Eurozone core inflation being stuck around 1%, you can see why the euro is stuck in recent ranges as well. 

The market has moved over the last 4 weeks or so, from expecting 5 interest rate hikes between now and the end of 2019, to just about 2. It gives a 70% probability of a rate hike this month and then a 50% probability of a rate hike by September 2019. Despite generally positive comments coming from the G20 meeting at the end of last month, the market is concern over global trade. The current market logic is that US equity markets seems to be soft on trade war fears, which leads to lower US yields and then a weaker dollar. As the Head of Chinese telecoms giant Huawei has been arrested in Canada, at the US request for alleged sanctions violations relating to Iran, it is apparent that actions speak louder than words. However, looking at the path for US interest rates, and therefore, the probable course for the dollar, Fed Chair Powell has been very positive over the current performance and future prospects of the US economy. The current dollar weakness may well only be temporary.

A slowdown in global trade is generally not good news for the commodity currencies, and until a deal can be agreed between the US and China, it would be reasonable to expect AUD, NZD and CAD weakness. If you add in oil weakness, then it is no surprise that the CAD has been soft recently. Having said that last Friday’s Canadian jobs report was way above expectations, and when combined with OPEC and non-OPEC countries agreeing to cut a total of 1.2 million barrels per day (bpd), the CAD jumped 1% against the US dollar.

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