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The ‘commodity currencies’ in the context of the US-China trade truce

Marius Paun | London, UK | Senior dealer | Wednesday, 15th January 2020

This is the week when the US and China are set to sign the first part of the agreement to put a stop to their 18 months trade war. The so-called ‘phase one’ deal will be formalised today at a White House ceremony. Many analysts have the impression that this can only be a temporary compromise between Beijing and Washington at a time when both countries are concerned the global economic outlook is rather fragile. So let us take a look at two, so-called, commodity currencies; the Australian dollar and the Canadian dollar. Could they be the proxy that represents the Asia vs North America competition, when it comes to the pace of economic growth?

One could find many similarities between the two nations: geographically both have a sizeable area with the population thinly dispersed, they enjoy a strong rule of law (common law), relatively stable political system (considered solid democracies) and both have a free exchange rate mechanism. Additionally, both countries are geared towards natural resources so their respective currencies tend to rise when commodity markets rally and decline when demand for raw materials wanes.

Canada, as the larger economy of the two, is the tenth-largest economy in the world with a gross domestic product of $1.73 trillion. It has a population of close to 38 million and the Canadian dollar is the fifth most widely held reserve currency. Its total exports were over $450 billion in 2018. The top four export goods, amounting to around half of Canadian global shipments, were oil and minerals (22%), cars (14%), machinery including computers (8%) and precious metals (4%). Unsurprisingly three-quarters of Canadian exports went to the United States. However, by comparison, only 12% went to Asia and specifically, just 4.7% of Canadian exports went to China.

On the other hand, Australia is the world’s 13th largest economy, valued at around $ 1.37 trillion and has a population of over 25 million. The Australian dollar is the sixth most widely held currency accounting for just shy of 2% of global foreign exchange reserves. Australia’s total exports were roughly $254 billion. Like Canada, the top spot is oil and minerals (35%) followed by ores and slag (24%), precious metals (6%) and meat (4%). Around half of Australian exports went to Asia: China (30%) Japan (10%) South Korea (5.4%) and India (4%). Only 3.6% went to the United States.

So, in a nutshell, China is crucially important to Australia as their main buyer and conversely, the US is the top destination for Canadian exports. Both have a symbiotic relationship with their top trading partners.

What therefore does the AUD/CAD foreign exchange pair (potentially) signal about the US-China trade dispute going forward? AUD/CAD is trading around 0.90 marks now and for the past 3 years has been in a fairly tight range, 15% around the current price. Peak Aussie dollar strength was in April 2017 when the AUDCAD reached 1.0344. Top strength for the Canadian dollar was in September last year at around 0.8834.

Looking at the chart, the Aussie dollar is clearly in a downtrend over the long term. Nonetheless, for the medium term, it seems to have gone sideways, certainly since late July 2019.

The 9 week and 21 week moving averages appeared to cross over recently but that was a false signal. They are both pointing downward again. If the downtrend is to continue, we need to see confirmation of a breach below support at 0.89, last week’s low.

On the upside, the first line of resistance will be met around 0.9050-0.9070 range, which held pretty solidly for the most part of the last 6 months. The bulls will target 0.9120 next as a break above that mark will shift the medium-term outlook from sideways to bullish. The buyers will also watch the 23.6% Fibonacci retracement at 0.9175.

Over the long term, one possible interpretation is that so far, on a relative basis, North America has done better than Asia, but a rebound in Aussie could suggest it’s time to shift alliances into Asia. After all, the demographics are clearly on Asia’s side and demographics has been dubbed as the top driver for future economic growth.

Weekly Market Wrap 06/01/2020-10/01/2020

Marius Paun | London, UK | Senior dealer | Friday, 10th January 2020

The week started with tensions escalating between the US and Iran. President Donald Trump threatened to strike Tehran in a disproportionate manner should any US person or target get hit. However, Iran could not be seen to be doing anything and retaliated by hitting the Baghdad Green Zone of the US embassy in a rocket attack. Things seemed to escalate as Washington denied an entry visa to Iran’s foreign minister. Furthermore, Tehran said they will abandon the nuclear deal it had with the UN.

By Wednesday afternoon Trump issued a statement promising that Iran will never be allowed to have nuclear weapons. He added that no American was harmed in the missiles attack and that Iran appears to be standing down. Markets took that as a sign of de-escalation.

Meanwhile, on the domestic front, the US ISM non-manufacturing index surpassed expectations at 55 vs 54.5. For the job market though things did not look as good. December non-farm payrolls data disappointed with only 145,000 jobs being added versus predictions for growth of 160,000. Additionally, average hourly earnings rose by just 2.9%, below projections of 3.1%. What’s interesting is that despite the geopolitical tensions, the US indices have made fresh all-time highs for the last two sessions.

Although we’re getting close to the date of signing the phase one deal (15th January), there are reports that China will actually not increase its import purchases of US agricultural goods.

Back in the UK Parliament, the House of Commons voted 330 to 231 in favour of a bill to allow Britain to leave EU on January 31. The pound sterling finished the week slightly lower, trading around 1.3050 to the US dollar, going into the close.

The new European Commission president Ursula von der Leyen said ‘there is not enough time for a full UK-EU deal by the end of 2020’. Her comments reignited concerns that the risk of a no-deal exit is now back on the table.

Australia continues to make the headlines due to the bushfires which have devastated the country. So much so that Goldman Sachs assessed the impact and predicted bushfires will cut 0.3% from GDP. The negative impact could be partially offset by a boost in government spending although a drag on tourism is undoubtedly expected. After coming within touching distance from 0.7 to the US dollar, the Australian dollar has posted the second weekly decline, trading now below 0.69.

The recent Middle Eastern tensions sparked an oil rally. Is it enough for a true comeback?

Marius Paun | London, UK | Senior dealer | Wednesday, 08th January 2020

Last December OPEC+ alliance (OPEC and non-cartel member Russia) agreed to cut oil production by an additional half a million barrels a day. Saudi Arabia, the biggest OPEC producer, accepted a further reduction of 400,000 barrels. Together with previous cuts, the market saw in excess of 2 million barrels being taken off the table in 2019 alone, from the total produced the previous year. The initial reaction was indeed a spike higher, of around 2%, in crude prices, but in the following sessions, the sentiment looked muted. The headlines were again ‘no one cares about crude anymore’.

It was reminiscent of the drone attacks on the Saudi refinery back in September same year. Crude prices surged initially, only to retrace within weeks and actually move below the level seen at the time of aggression. So, on one hand, OPEC got cold feet regarding the oversupply amid the US becoming a net exporter for the first time since 1978 (according to US government data). The US shale oil production was portrayed as a big contributor to that shift. On the other hand, there are increased concerns that a US-China trade war, as well as what seems to be a step back from globalization, will reduce the global oil demand even further.

But perhaps to understand why oil prices are so out of fashion is better to look at some statistics.

The Financial Times showed that the market capitalisation of Apple has recently surpassed the entire S&P 500 energy sector (roughly $1.1 trillion) comprising of 28 companies. CNBC reported that the S&P 500 energy sector was ‘the worst performer of the last decade’ up an anaemic 5% compared with 180% gains for the whole index. Furthermore, energy presently has a weighting of just 4% in the S&P 500 versus more than 13% in 1990.

Despite seeming so apparently “out of fashion”, crude oil prices soared 3% last Friday after the US killed Iran’s most powerful military commander, Qassem Soleimani, in an airstrike in Baghdad. Concerns were raised of a bigger conflict between the two nations (already at serious odds) that could disrupt oil production and send prices even higher. That’s because Iran controls the Strait of Hormuz and has repeatedly threatened to shut it down.  The strait of Hormuz is a strait between the Persian Gulf and the Gulf of Oman providing the only passage to the open ocean. The fact that around 20% of global oil passes through it every day makes it a strategic point for international energy trade.

On the flip side, the financial press is awash with the views that past conflicts in the Middle East have attracted a more sizeable spike in crude prices, suggesting that the aforementioned US shale driven oversupply has triggered a limited interest towards tensions in the Gulf region. On Monday the US oil prices surged above $64.69, a level was last seen in April last year but ended the day lower. It could be that despite the escalation in the tension between the US and Iran, the oil supply in the region has not been as disrupted as originally feared. It mattered less that US President Donal Trump vowed to impose heavy sanctions on Iraq if American troops are forced to leave, Or that 50 Iranian sites could be hit if Tehran retaliates.

Somewhat as expected, last night Iran retaliated by hitting the US military bases in Iraq in a rocket attack. It is unclear yet the level of, if any, casualties, but so far there are no reports of any disruption in the oil supply. It appears Iranians did not target any major energy infrastructure. That’s possibly the reason why US crude prices jumped overnight to a recent high of $65.62 but ultimately drifted back down to below $62 a barrel at the time of writing. It’s still too early to conclude if a wider scale conflict was indeed averted. After all, Donald Trump tweeted ‘All is well and assessment of damages is taking place now’.

Let’s take a look at the long-term chart

The momentum now is with the bulls as indicated by the moving averages. The short-term MA (red line) has crossed above the longer-term one (blue line), both are pointing upwards and the price is above them.

On the upside, a sustained move above $63.6 which is 61.8% Fibonacci retracement will indicate the increasing buying power. This morning the next target just above $64 was reached but it attracted a sharp pullback. That move needs to be confirmed is the uptrend is to continue. Bulls will undoubtedly look to $66.57 the high of 21st of April last year. Overcoming that hurdle will shift the medium-term trend to bullish as well.

On the downside, the immediate target is just below $61 and a test is imminent. A move below that mark will signal the presence of sellers. If that downward move brings enough momentum than the pullback could extend to $59.80 – the 50% Fibonacci retracement. Support at $58 is the next target for the bears.

Weekly Market Wrap 30/12/2019-03/01/2020

 Marius Paun | London, UK | Senior dealer | Friday, 03rd January 2020

On Monday, the US goods trade balance figures showed a surprise narrowing in the deficit. It was largely due to a fall of across the board imports, consumer goods, industrial supplies as well as capital goods. On the same positive note, US stocks closed the year on a high: Nasdaq was by far the clear winner, up over 35%, S&P rose almost 29% and Dow Jones gained over 22%.

China PMI data for December came in at 50.2 slightly better than expectations of 50.1. The main reason was export orders going back into expansion territory which last time was seen in May 2018. More good news, US President Donald Trump reiterated that he will sign the Phase 1 trade deal China on January 15 and subsequently will travel to Beijing later on to begin talks for Phase2.

In the UK, former Prime Minister Theresa May saw her attempts of delivering the exit deal blocked by the Parliament over and over again. The stalemate came to an end when an election was called and the British public sided with Boris Johnson (the only major candidate who promised to end the whole saga). The result sparked a fresh rally in the GBPUSD to over 1.35. However, there is a widespread opinion that closing a trade deal with the European Union in 2020 is going to be a serious challenge. So the pound sterling retraced to 1.31 currently.

Meanwhile EU trade commissioner Phil Hogan was quoted saying that UK Prime Minister Boris Johnson will not keep his promise of exiting the transition period by the end of 2020. Latest news PM Boris Johnson is going to meet the new European Commission President Ursula von der Leyen next Wednesday at Downing Street.

On Friday morning Reuters reported (confirmed by the US officials) that a senior Iranian general – Qassem Soleimani has been killed in an airstrike at Baghdad airport. He was seen by the Pentagon as the main target, who has recently orchestrated the attack on the US  embassy in Iraq. Iran’s spiritual leader Khamenei promised ‘severe retaliation’. As a consequence, the oil prices spiked to an eight-month high. On top of that gold has also attracted buyers and pushed above $1550.

 

Weekly Market Wrap 23-27/12/2019

Marius Paun | London, UK | Senior dealer | Friday, 27th December 2019

The US President Donald Trump has reiterated that a breakthrough on ‘trade deal will be signed very shortly’ lending support to the equity markets. Gold managed to break above the $1500 mark supported by a North Korean ‘promise’ to send the US a Christmas gift which the media speculated could be yet another missile test launch. And indeed the US Federal Aviation Administration alerted the commercial airliners of a possible missile launch prior to the end of 2019.

Meanwhile, amid low volumes due to Christmas holiday, the US stocks made new highs almost on a daily basis and are firmly on course for the best year in the last two decades (above 20% gains). Will the trend continue into 2020 given the US election?

China’s state media reported that beginning with January 1st next year it will cut import tariffs on around 850 goods. At the same time, China forex market regulator said the phase one deal should help to ‘balance’ currency market while planning to increase yuan’s convertibility next year.

In the UK, the Times newspaper said EU negotiators could use threatening tactics of restricting City of London’s access to European markets. That is meant to force London to agree to Brussels rules. Furthermore, EU leaders mentioned the possibility of putting barriers to data flows. However, the pound sterling seemed unfazed and if anything resumed its rally against the US dollar breaking back above 1.31.

Australia’s private sector credit growth surprised on the downside last week coming in at +0.1% versus expectations of +0.2%. Reserve Bank of Australia’s figures showed that while credit to business picked up recently, housing credit did most of the damage due to the ongoing real estate downturn.

We also had Bank of Japan monetary policy meeting for December where there was consensus the current direction will be maintained. If necessary BoJ is not ruling out future interventions.

Weekly Market Wrap 16-20/12/2019

Marius Paun | London, UK | Senior dealer | Friday, 20th December 2019

The US President Donald Trump has become the third president in the country’s history to get impeached (along with Bill Clinton and Richard Nixon) by the House of Representatives and now faces a trial in the US Senate. The Representatives are controlled by Democrats whereas the Senate is controlled by Republicans, so many analysts were quick to express doubt that Trump will, in the end, be removed from office. As a possible hint to support that view, the US markets seemed unfazed by the decision so far with the Dow Jones and S&P500 making consistent new all-time highs.

Despite the trade dispute with the US, China’s industrial production for November increased 6.2% year on year versus an expectation for a 5% rise. In response to the phase one agreement, Beijing has also announced the suspension of additional tariffs of 5-10% for some US goods planned to take effect on December 15.

The UK Prime Minister Boris Johnson is reported to be planning for a revision to the existing EU exit deal that would rule out extending the transition period beyond the December 2020 deadline. In effect, this move would potentially bring the feared no-deal scenario back on the table. EU’s chief negotiator Michel Barnier has already said that ‘striking a comprehensive free trade deal in 11 months will be impossible’. As a result, the GBPUSD gave back all those significant gains made during the last few weeks, dropping from a high of over 1.35 to around 1.3050 currently, below the election level.

Bank of England left its interest rate unchanged at 0.75%, as widely predicted, with a vote split of 7-2. The Monetary Policy Committee reiterated that ‘the existing stance of monetary policy is appropriate’. Meanwhile, on Friday afternoon, the UK lawmakers voted to approve Boris Johnson’s withdrawal bill so Britain is set to leave EU on 31st of January.

We also had a string of PMI data releases this past week. In the EU manufacturing, PMI surprised to the downside (43.4 vs 44.6 anticipated). In the UK both services and manufacturing PMI were worse than expected and in the contraction territory (47.4 and 49 respectively). Across the Atlantic, there was a different picture still pointing to expansion. The US manufacturing PMI was 52.5 with services PMI coming in at 52.6.

Reserve Bank of Australia’s meeting minutes for December were released earlier in the week and showed the Board agreeing to reassess ‘economic outlook at February meeting’. They acknowledged the persisting risks for the global economy being on the downside but added that Australia appears to have reached a ‘gentle point’, hoping to send the message that the balance is good, for now… and, of course, the extra stimulus could still be used if needed. However, there’s growing speculation among financial pundits that more cuts are on the cards early next year, possibly to as low as 0.25%. The Aussie dollar continued to rebound and now sits just above 0.69 to the US dollar.

We finish with an interesting one, the Swedish central bank ended five years of negative interest rates by raising its benchmark from -0.25% to 0. It has done that despite a slowdown in the economy arguing that negative rates are more damaging in different ways. They boost asset prices and encourage taking on more debt. Is that a one-off, or will more central bankers follow?

 

 

‘Get Brexit done’…tick But is it all good news for FTSE100?

 Marius Paun | London, UK | Senior dealer | Wednesday, 18th December 2019

Finally, we had the general elections here in the UK. The Conservative party won it with a landslide, giving Prime Minister Boris Johnson a very comfortable majority of 80 seats in the House of Commons. What was surprising was not necessary the victory, which was predicted by the polls, but the extent of it, with the Labour party suffering the worst defeat for more than 30 years. So it is safe to say that some of the political uncertainty regarding Brexit has been considerably reduced. The UK Government’s slim majority which in turn fuelled an ongoing internal division has now dissipated.

However, even with the domestic disruption out of the picture, things are not at all settled. The current deadline for leaving the EU is 31st of January 2020 and that seems to be the last one. At the same time, Boris Johnson promised to strike a trading deal with the EU by the end of 2020. This has prompted Brussels leaders to start to moan….’ it will be difficult’ or ‘there won’t be enough time’. And the main reason mentioned in the press is that between the time of leaving the EU and reaching a trade deal, the UK will still be bound by the single market rules. For now, at least, the deal Johnson negotiated before the election is the status quo. Can we expect some extra pressure from the British side for a speedier process? Let’s wait and see.

In addition, the UK voters sent a clear message that they are not keen for higher taxes, a massive increase in spending, a return to the nationalisation of several industries or outright hostility towards entrepreneurial spirit. Markets reacted immediately and the feel-good factor sparked a sharp rally in the pound sterling (although it retraced to a level seen before the election in less than a week). But what about shares? The financial press is filled with hints that this a good time to think about having some exposure to UK stocks.

Recently, the UK market was trading on an average price to earnings ratio (widely used as an indicator for valuation) of below 13 times, which is well below its long-term average of around 16. Regarding Brexit, Capital Economics is pointing out that before the 2016 referendum, the US and the UK had a price to earnings ratios very close to each other. But since then there was a very fast decoupling, which led to the UK has a 25% lower valuation currently compared to the US. Interestingly enough, Barclays Bank said that global funds managers have reduced their share of UK assets since the referendum on a consistent basis. UK assets outflows surpassed 10% in 2019. Nonetheless, Barclays added they’re seeing the tides turning with fund managers buying into Britain again.

Investing in FTSE 100 shares as a way to get exposure to the UK economy could be misleading though. Yes, the FTSE 100 is comprised of the largest hundred companies in the UK, by the market capitalisation, but these companies are predominantly big multinational corporations which have earnings in foreign currencies. In fact, over 50% of those earnings are coming from operations abroad, mainly in the USD, which then will be transferred back into GBP. So, stronger pound sterling will make those foreign earnings worthless, thus putting downward pressure on FTSE 100, despite the UK economy possibly starting to improve in performance. A case in point was the Brexit referendum in 2016 when sterling nosedived and yet the FTSE 100 rallied, despite the perceived negative impact.

By and large, the trend for the best part of the last three years has been sideways. Yes, it made an all-time high at 7902 on May 2018, but after that, an abrupt selloff followed. It is now at a level not far from the same time in 2016. As a side note, whilst all the US indices are making new record highs on a regular basis these days, FTSE 100 is still over 350 points off its record high. Whilst the fundamental narrative for a catch up with the US is strong, the technical picture is not so clear cut.

Bullish outlook

Recently, the FTSE 100 has shot up, even before the election, crossing above the strong resistance around 7430-7460 handle. The short-term trend is now up, and the next target is at 7600 marks followed by 7700-7720 area. If a breach of these potential resistance levels is successful, it will open the door for testing of the all-time high of 7902.

Bearish outlook

On the downside, the aforementioned resistance turned support at 7430-7460 comes first in line. Then, bears need to consider the 61.8 Fibonacci retracements (high of 7902 and low of 6500). Getting through here would clear the way to the next target, just below 7295, followed by 7200.

Tories have secured majority —–Now to “Get Brexit Done”

Marius Paun | London, UK | Senior dealer | Friday, 13th December 2019

On Monday, sentiment turned sour between the world’s two biggest economies. In a tit for tat move to the US imposing a ban on purchases of Chinese technology, Beijing ordered all government offices to remove all foreign hardware and software within three years. Meanwhile, inflation data showed that with surging food prices being the main driver, the CPI has risen to 4.5%. What’s causing most concern is that pork prices, in particular, moved up an eye-watering 110% year on year.

In the US, the Federal Open Market Committee left its benchmark interest rate unchanged at 1.75% as was widely expected. In his opening statement, the Chair Jerome Powell said the US economic outlook remains largely favourable despite headwinds on the global scene. He added income is rising, as is consumer confidence, whilst inflation is still below 2% and growth is set to continue. All rather good, but then why QE?… oh wait, as Powell says, “don’t want to call it that way”

Late on Friday China held a press conference saying it has agreed on a deal with the US, subject to President Donald Trump signing it. It appears that the 25% tariffs will remain in place, the White House confirmed, but the new 15% additional duties will not take effect on Sunday. Both sides worked around the clock to have something done before the 15th of December deadline.

It was a very busy week back in the UK with a general election taking place on Thursday. As previously indicated by the polls (which were right this time!) the Conservative Party won by quite a margin. They needed 326 seats to secure a majority in the House of Commons yet they now have 365 seats gaining most from the main opposition party, Labour.

Although it is still unclear how trade negotiations with the European Union will unfold, at least the uncertainty of Brexit actually happening is now perceived as lifted. As a result, the GBP spiked over 2% against the USD when exit polls were announced, reaching an intraday high of 1.3515.

As per their peers, the European Central Bank decided to keep interest rates on hold at 0%. But the interesting piece, closely scrutinized by investors and media alike, was the first press conference from the new President Christine Lagarde. And the overall verdict is that she held her ground, came out well, doing things her way rather than following in the predecessors’ footsteps.

Back in Europe, the Swiss National Bank left their interest rate well in negative territory at -0.75% saying the Swiss franc continues to be ‘highly valued’ and it stands ready to intervene if needed. Very original!… is there any central banker in the world who does not say that these days?

The final note of interest is Aramco, the Saudi Arabia oil and gas company which had its IPO this week on the local exchange, Tadawul. Although the starting valuation was around $1.7 trillion, within two days of trading it reached $2 trillion. It’s now the world’s biggest company by market capitalization, dwarfing Apple and Microsoft, which are valued at just over $1 trillion.

The outlook for GBPUSD from UK election/Brexit perspectives

Marius Paun | London, UK | Senior dealer | Wednesday, 11th December 2019

There is little doubt that since the Brexit referendum, back in 2016, the fate of pound sterling and UK stocks both have been closely intertwined with the political process, to an extent rarely seen before. As you may know by now, to the surprise of most global observers, the Brexiteers camp won it by 52% versus 48% for the Remainers. However, the delivery process has proved by no means an easy affair. Initially, the UK was due to conclude the withdrawing from Europe on March 29th 2019. But that did not happen. There were a few exit deals negotiated by the UK Government with the EU, which were subsequently declined by the UK Parliament one by one. Instead, the UK government had to go back and ask for an extension and come back with another supposedly better deal.

It must be mentioned the majority of UK members of Parliament were Remainers rather than Brexiteers and that was possibly the main reason the delivery process has failed so far. The GBPUSD followed those failures and slumped from a high of 1.5016 seen in June 2016 to as low as 1.14 on October 2016 when Prime Minister Theresa May gave her infamous bad speech, which was followed by a flash crash during Asian Trading session which saw the pound losing 6% against the dollar. Eventually, May resigned and Boris Johnson took over and surprised the markets when he came back from Europe with a new deal. In reaction, the GBPUSD rallied from a low of 1.21 to around 1.29.

Despite Parliament demanding amendments to the old deal (very few thought it would ever happen) when it came to the vote, they failed, yet again, to ratify it. So, the Brexit deadline was extended yet again and is currently January 31st 2020. Despite the last pushback the 1.29 level held rather well. Feeling the country is stuck in no man’s land and in an attempt to address the lingering uncertainty, Boris Johnson triggered a general election.

There were too many voices asking for a second referendum blaming Government lies during the campaign for the first Brexit vote and/or voters not understanding what they were voting for. In effect, some see elections as a proxy for the second referendum given where main political parties sit. If the Conservatives win, there will be some kind of Brexit. If Labour wins, it seems the UK public will get to vote officially on a second referendum but Labour will be in the remain camp. If the Liberal Democrats win, there will be no Brexit at all.

During the last few weeks, the election polls had a significant impact (mainly positive) on the sterling pound. It recently broke above the psychologically important 1.30 to the US dollar, rallying close to 2%. It was the biggest gain since October on the back of polls continuing to indicate a 10-point lead for Boris Johnson’s Conservatives party over Labour. That is seen favourably by global markets as Tories are considered the most pro-business choice. They are also the most likely to put the Brexit subject to rest, quicker than other parties. Nonetheless, polls can be misleading if recent history is anything to go by. Just think the double surprise of Brexit referendum and US Presidential elections.

If anyone doubted that Thursday’s elections are the main driver for GBPUSD currently, trumping the economic data, look no further than the latest figures. Last week the PMI pointed to contraction in the UK manufacturing, services and construction sectors. On top of that on Tuesday, the monthly GDP came in flat. Yet the GBPUSD stayed close to the recent highs around 1.32 mark.

Let’s look at the chart and discuss possible scenarios:

Bullish scenario

The most likely outcome is a Conservative majority which will open the doors for Brexit to move into the next phase of negotiating the technical details. At least the uncertainty of whether to come out of Europe or reverse Brexit and staying in is lifted. On that outcome GBPUSD will probably push through resistance at 1.3380 the March 2019 highs quite easily. Above that, the next target will be 1.3470 which matches with the 61.8 Fibonacci retracements. Then 1.3750 comes to attention.

First bearish followed by a possible bullish scenario

A less likely scenario, but quite possible, is a minority government led by Labour and supported by Scottish National Party and /or Liberal Democrats. Regardless of how that coalition would look like in the end, it will probably lead to a second referendum. The UK and EU will restart negotiations and the leave camp will face even more hurdles to win it again let alone deliver it. The renewed uncertainty will probably trigger a selloff. The support at 1.30 will be the next target followed by 1.2860. However, once a second referendum becomes the only solution, a slight recovery could be on the cards. So, expect a downtrend (hard to tell how steep) first, followed by a possible relief rally.

Really bearish scenario

A majority Labour government is the least likely but should be considered given the radical manifesto promised by Jeremy Corbyn&Co which some voters might find appealing. Labour targeted the business owners vowing to impose tax hikes, nationalise utilities, transport, post offices and part of the telecom industry. And for every £1 promised by Tories, Labour would spend an eye-watering £28. So we might expect an outlier result, either a shocking turnaround or a spectacular failure. Capital Economics looked at history and said a left-wing victory in France in 1981 led to a 15% fall in French equities. A sharp selloff in GBPUSD would be the most probable outcome. It would not be a surprise to see GBPUSD retesting the lows of 1.1957, touched in September 2019, in rather quick time.

 

 

 

Weekly Market Wrap 02-06/12/2019

Marius Paun | London, UK | Senior dealer | Friday, 06th December 2019

China Caixin November PMI came in at 51.8 versus consensus for 51.5 showing that despite 18 months of the trade dispute with the US, their manufacturing base is still expanding. Speaking of trade disputes…. Global times reported that Beijing still insists that tariffs should be rolled back as part of the so-called Phase One deal.

The US economy surprised the markets by adding 266,000 jobs in November. It was far better than polls had predicted, a gain of 186,000 jobs, according to numbers released by the Labor Department. At the same time, the unemployment rate declined to 3.5% from 3.6% previously with average hourly earnings risings 0.2%, less than 0.3% anticipated.

On Thursday the US President, Donald Trump, said the world’s two largest economies were getting closer to sign the phase one of a trade deal. That came after his comments made on Tuesday, where he expressed views that ‘it may be better to wait until after next year election before making a trade deal with China’. So shares started the week on the back foot but finished strongly. However, the reality is that tariffs an another $156 billion worth of Chinese goods are due to come into effect on December 15th. But the markets appear to view that as a problem for next week!

In the UK the latest poll indicated the Conservatives hold a comfortable lead of 10% against the opposition Labour Party, 42% vs 32%. With the country due to vote in the Parliamentary election in the coming week, it was good enough to push the pound sterling above the recent resistance of 1.3 to the US dollar. GBPUSD was trading around 1.3150 late on Friday.

European Commission promised to act like one after the US planned tariffs on French goods, some of which could reach 100%. The move came in retaliation after France introduced a 3% digital service tax which Washington sees detrimental, especially for American companies.

The Reserve Bank of Australia held its key rate unchanged at 0.75% as was widely expected. It added the global outlook is ‘reasonable but with risk tilted to the downside’. By and large, the statement was more of the same old rhetoric of; rates to say low for an extended period; inflation close to 2% for the next two year; and it stands ready to intervene if needed. Nonetheless, as the saying goes ‘no bad news is good news’, hence the Australian dollar moved higher, crossing above 0.68 to the greenback.

Bank of Canada also kept interest rates on hold at 1.75%, acknowledging that ongoing trade conflicts remain the biggest risk to the global outlook. However, it sees commodities prices and the Canadian dollar remaining relatively stable.

Meanwhile, OPEC members and their non-OPEC allies agreed to another set of production cuts by an additional 500,000 barrels per day through to March 2020. In effect that will reduce the group’s total output by 1.7 million barrels per day. Oil prices were slightly lower on Friday afternoon when the announcement was made.