Breaking News
0

Brexit, Italy And Risk Aversion Drive Post-Holiday FX Flows

By Kathy LienForexNov 23, 2018 20:15
uk.investing.com/analysis/brexit-italy-and-risk-aversion-drive-postholiday-fx-flows-200204850
Brexit, Italy And Risk Aversion Drive Post-Holiday FX Flows
By Kathy Lien   |  Nov 23, 2018 20:15
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Daily FX Market Roundup 11.23.18.

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

The biggest story last week was the meltdown in equities that spilled over to currencies. U.S. stocks turned negative for the year after erasing all of their gains. This is significant because less than 2 months ago, the S&P 500 was up about 9%. It lost all of that in a matter of a month, recovered briefly and is now back in the red. As a result, risk aversion drove all of the major currencies lower against the U.S. dollar. The Canadian dollar was hit the hardest although a large part of that had to do with the decline in oil prices. The Japanese yen and Swiss franc were the best performers, which is natural in a risk-averse environment while the Australian and New Zealand dollars were the worst. Looking ahead, the last week of November brings a renewed focus on Brexit and trade in the lead up to the EU’s Brexit summit and the G20 meeting. There’s also data on the calendar that could be market moving including Germany’s IFO and unemployment reports, the U.S.’ confidence, trade, personal income, personal spending, Q3 GDP revisions, the Fed minutes, New Zealand’s trade balance and Chinese PMIs.

With European leaders scheduled to hold a special Brexit summit on Sunday, by the time the forex market reopens, we should know if the meeting went well. Earlier in the week, sterling popped after Prime Minister May managed to secure a deal with the European Union but the agreement does not resolve many of the major issues that put the deal at risk. For the EU, Gibraltar, the Irish backstop and fishing rights are lingering problems that could scuttle the deal. Spain made it clear that it will reject any agreement that leaves the country out out of talks involving the status of Gibraltar. Now the UK needs a majority (not all) of the 27 member states to support the agreement but given Spain’s role, the agreement will most likely be amended, which could lead to further back-and-forth to satisfy its concerns. For the UK, even if EU leaders approve the agreement, Prime Minister May still needs to sell it to Parliament. She needs 320 votes to pass a deal and there are 650 seats in Parliament. She should have at least 316 conservative votes but there’s almost no chance that she’ll get any of the 10 DUP votes so her job will be to convince members of the opposition Labour party to support her deal. It will be an uphill battle because Labour thinks most of its members will reject her agreement but there are Labour rebels and Brexit supporters who could be swayed. What this means is that even if the EU approves the Brexit agreement over the weekend – and we think it will – GBP/USD will rally but beware of jumping in too quickly because the big battle will be Parliament.

Meanwhile, Italy’s troubles continue to plague the euro, which fell to fresh lows against the greenback. Last week, the European Commission opened disciplinary measures against Italy for refusing to submit a budget proposal that complies with its rules. EU member states have 2 weeks to agree with the EC’s decision to begin the Excessive Deficit Procedure (EDP) and if they do, the EC will give Italy the opportunity to prepare a response on how it will rein its deficit in and bring it back into compliance with EU rules. If its response is unsatisfactory, it could be slapped with sanctions. Unfortunately it seems like Italy is prepared for the clash with the EU because a day after disciplinary procedures were opened, Italian Deputy Prime Minister Matteo Salvani said “We will not take a backward step, we are not spending this money at random. The idea is for Italy to grow.” Between Italy’s political troubles and weaker Eurozone growth, any recovery in EUR/USD should be limited to the 100-day SMA near 1.1550. As indicated by last week’s PMI reports, the Eurozone economy is slowing with German, French and Eurozone PMIs falling sharply in November. German manufacturing activity in particular grew at its weakest pace since 2014. Therefore this week’s German IFO, unemployment and CPI reports should be softer, reinforcing the trend of weaker growth. Although the ECB will proceed with its plan to end asset purchases this year, further steps to normalize monetary policy could be delayed by the deterioration in data, decline in oil and meltdown in global equities. The ECB could even lower its economic projections at the next policy meeting.

Last but not least, the Canadian dollar has been hit hard by the decline in oil prices. Since peaking in the beginning of October, the price of crude has fallen more than 30% with prices dropping to a fresh 1-year low last week. The problem is even more severe for Canada because Western Canada Select, the primary blend sold by Alberta’s oil sands, closed at its lowest level in a decade. Weakening demand combined with new oil-sands projects compounded the problem for Canada and with each passing day, the pressure grows. If this trend continues, it will be very difficult for the Bank of Canada to raise interest rates, even if next week’s monthly and quarterly GDP numbers surprise to the upside. The latest Canadian retail sales and inflation numbers were mixed – while CPI and headline retail sales rose more than expected, core spending growth missed expectations. So instead of strengthening, the Canadian dollar weakened on the data with USD/CAD ending Friday sharply higher.

Brexit, Italy And Risk Aversion Drive Post-Holiday FX Flows
 
Brexit, Italy And Risk Aversion Drive Post-Holiday FX Flows

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email