The British pound is near 5-month highs ahead of Saturday’s showdown as the UK parliament is being asked to ratify the deal that PM Johnson and his EU counterparts reached to avoid a hard Brexit on October 31. The odds of Boris Johnson rallying lawmakers to support his deal are not good, but anything Brexit related comes with room for a surprise result. Theresa May’s decision to trigger a snap election that took the DUP from the fringes of UK politics to king makers and the Northern Ireland MPs could end up derailing this new deal on the table.
China’s GDP on Thursday night confirmed the slowdown of the Asian economy. The Chinese economy was losing momentum even before a prolonged trade war with the US and posted a 6% quarterly growth, the lowest since March 1992, when records began to be kept. Industrial production beat expectations but was the single upbeat indicator as consumers met expectations excluding car sales that have been on a downward spiral for the last 15 months.
Euro rises as Brexit Hopes Boost Single Currency
Next week ECB President Mario Draghi will deliver his last speech as head of the central bank as he makes way for his successor Christine Lagarde who takes over in November. The central bank has taken interest rates to negative territory and has renewed its QE program to avoid the EU falling into a recession.
The ECB’s arsenal appears depleted and leaves Lagarde few options outside of diplomacy to enact economic change in Europe. Draghi was well known for this “whatever it takes” attitude, but the ECB might have overextended itself as per his critics who are already pressuring Lagarde to reduce stimulus.
The economic calendar is light on US indicator releases. The economy is sending mixed signals and the market has been more sensitive to data missing the mark as it expects the U.S. Federal Reserve to cut its benchmark rate on October 30.
The limited agreement struck between the US and China last Friday sparked a wave of optimism but as the days drag on it is starting to wear off.
The US dollar is on the back foot as risk aversion eased and investors looked for higher yields and sold the greenback.
The Brexit deal agreed between the UK PM and European leaders supported the risk on mood, but as the odds of parliament ratifying the deal started to get long the US dollar is likely to find its footing ahead of the weekend and the uncertainty of the outcome.
USD/CAD
The loonie appreciated in the last five trading sessions and looks to close the week on positive territory. Oil prices have defied expectations, but there could be an impact from the election results.
Canadians will head to the polls on Monday with a minority government the most likely result. The Liberals will lose their majority and without conservatives closing the gap, the big winners could be the New Democratic Party forming a party with the Liberals.
The USD is on the back foot, and more risk appetite could push the CAD to break under 1.30 against the greenback.
BITCOIN
Bitcoin traders are breathing a sigh of relief after the plummet below $8,000 seems temporary. Thursday’s rise is significant as the past few days saw many investors join the bearish camp. If Bitcoin can finish out the week above the noted $8,000 level we could finally see it consolidate back towards the $8,750 region.
Bitcoin is more stable, but still pressured to the downside with the rise of the USD.
OIL
Oil prices brushed off a large buildup in US crude inventories and keeps moving higher as gasoline and distillates had a larger than expected drawdown. Growth concerns are balanced against US-China trade deal hopes and energy is caught in the middle.
Middle East tensions eased, but potential supply disruptions do not move the current market that is more focused on macro headwinds and less on supply/demand fundamentals. Oil is sensitive to various developments be it inventories, global growth, the trade war, Iranian sanctions or OPEC.
GOLD
Gold fell on the news PM Boris Johnson got a Brexit deal done with the EU, but that price action was short-lived. Gold is seeing buyers emerge and it seems it is only a matter of time before we see another run towards the $1,500 an ounce level.
With earnings starting to come in more mixed, the lack of fresh record high with US equities will likely see flows come back to oil. Trade optimism could evaporate giving gold a leg up.
New positions could be opened in the metal as price becomes more attractive with a high level of uncertainty still in the market.
POLITICS
Turkey’s steady military initiative in Syria is taking a break after VP Pence and President Erdogan reached an agreement for a cease-fire.
Turkey’s economy is in a very fragile state and while they expect 2020 to be a year which sees the economy rebound, if they get hit with fresh sanctions, that could derail a wrath of stimulus that is waiting to help growth enter a more sustainable path.
The lira volatility is likely to remain high as we will probably see a resumption of military attacks from Turkey after the cease-fire ends. Turkey is nowhere near being satisfied with their concerns that the Kurdish control an area so close to its border.
US – Iran
As Saudi Arabia and the US ramp up their defensive measures to protect critical hubs of oil protection, markets remain on edge over what will be the next escalation in tensions in the Middle East.
The US is deploying more troops in Saudi Arabia and helping the Saudis improve their anti-drone technologies. Right now, it feels like a game of chess with each side strategical enhancing their missile systems. We are one tanker attack, drone strike or missile offensive from going to war. It seems all parties do not want war, but we could the risks for accidentally getting to one are growing.
US Elections
It is a long way until the fifth Democratic debate on November 20th and that means we should see the focus shift to fundraising. While the field remains plentiful, markets are starting to expect the final four to become Warren, Biden, Buttigieg, and Sanders.
If Biden secures more funding in the coming weeks, he should be the favorite for the Democratic nomination. Warren and Sanders continue to split the progressive vote and we could see Bernie get a bounce after key endorsements from AOC and a solid performance at the last debate.
BREXIT
Boris Johnson has a tough job ahead of Saturday’s Parliamentary vote. He needs to convince MPs to vote for his Brexit deal or seek an extension of Article of 50. Johnson may choose to try to take UK out of the EU with a hard exit at the end of the month, but that may be less likely as he could lose that battle in the courts, thus giving up a lot of recently won political capital.
The upcoming Brexit vote is too close to call, but even if we see Johnson’s deal pass, this does not include a trade agreement so sterling’s gains would likely be capped around the 1.35 to 1.3750 region.
Market events to watch this week:
Tuesday, Oct 22
- 8:30am CAD Core Retail Sales m/m
- 10:30am CAD BOC Business Outlook Survey
Wednesday, Oct 23
- 10:30am USD Crude Oil Inventories
Thursday, Oct 24
- 3:15am EUR French Flash Services PMI
- 3:30am EUR German Flash Manufacturing PMI
- 3:30am EUR German Flash Services PMI
- 7:45am EUR Main Refinancing Rate
- 7:45am EUR Monetary Policy Statement
- 8:30am EUR ECB Press Conference
- 8:30am USD Core Durable Goods Orders m/m
*All times EDT
