Watch GBP and Boris’s next move
Today, FX traders are now intensely focused on UK. Like a car-crash its hard to take your eyes off the chaos. PM Johnsons masterful strategy to shorten parliament’s chance to define Brexit, was pure political theatrics. Opposition countered with legislation seeking to “stop the UK leaving the EU without a deal”. Yet clever Boris countered he would call for a snap general election on 14th October if MPs succeed in seizing control of Commons agenda. GBPUSD bear trend persisted breaking 1.200 psychological support. Part of the pairs weakness can be attributed to USD broad strengthen, but GBP weakness outpaced G10 peers. Threats from Tory MP who voted against the whip will face deselections increased the likelihood the legislation fails. However, there is a risk of wide insubordination, based on the x-PM Teresa May experience. The timelines for no no-deal legislation getting through both Houses are extremely tight, rising the uncertainty level. Despite the noise, the probability of a no-deal exit remains the highest outcome in our view. In this scenario, we would expect the BoE to jump into action to stabilize the economy with significant interest rate cuts. Yields on 10yr gilts fell to record low at 0.382%, on news of a potential early election. This would further pressure UK yield curve and drive GBP lower. Worry about overcrowding in GBP is unfounded as short positioning in the past has been greater. No-Deal Brexit is mostly but not fully priced into. The further downside in GBP against CHF and JPY looks likely given the political uncertainty market is facing this critical week.
AUD better bid after RBA rate decision
As broadly expected the Reserve Bank of Australia left the Official Cash rate at record low 1% at its September meeting. Little changes were made to the statement as the RBA continued to emphasize the lack of inflation pressure, as it expects inflation “to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.” Regarding the domestic conditions, the central bank noted that lower than expected in the first half of year but expect a gradual acceleration over the next couple of years. Finally, the central bank left the door wide open for further monetary easing as made a small change to the last sentence of the statement as it broaden the conditionality of a potential rate cut beyond developments of the labour market. “The Board will continue to monitor developments, including in the labour market, and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”
Despite a clear easing bias from the RBA, the Australian dollar appreciated against the greenback with AUD/USD climbing to 0.6718, up 0.50% from its pre-rate decision level. This bounce back suggests that market participants were expecting a much dovish statement. Overall, we maintain our dovish bias regarding AUD/USD. More rate cuts are down the road, as the RBA will try to soften the impact of a slowing Chinese economy.
