Good morning,

GBP: Finally

Sterling is rallying into tonight’s meaningful vote but considerable risks remain to the pound. Let’s not pretend that anybody truly knows how the vote will go tonight especially given the number of amendments kicking around and the back and forth of political jiggery┬ápokery┬áthat Westminster loves more than anything.

Depending on the number of amendments the Speaker selects to be voted upon before the ‘meaningful vote’ we could be in for a very long night. If no amendments are selected, the vote will be at 7pm. If all thirteen are selected then we may not get a result before midnight.

We have thought for months now that Theresa May’s plans were destined for the scrap heap and, as we outlined yesterday, the key determinants for sterling will be just by how much her plan is opposed by the House of Commons and whether Jeremy Corbyn responds by calling a confidence vote.

Yesterday Theresa May refused to definitively rule out the prospects of an extension to Article 50, something that is widely believed that will only be allowed by the European Union in the event of a general election or a second referendum.

A second referendum is rapidly becoming our base case of what happens in end. In the event that May’s deal is defeated, then we have a decision to make between no-deal, a second referendum or a deal that either has to contain the Northern Ireland backstop or breaches Brexiteer red lines on immigration by allowing free movement. There is only one choice in here that has a future.

As we noted yesterday, the consensus expectation within markets is that Article 50 is eventually extended, delaying Britain’s exit from the European Union until after March 29th. If the May government doesn’t mention such provisions in any post-vote communications then GDP could be in for a tough few weeks. Similarly, an immediate call for a confidence vote would be seen as a negative for the pound given the uncertainty over the Labour party’s Brexit position and what a Corbyn government would mean for the UK economy.

An upside for GDP will be found should the vote pass or the noises around the prospects of a second referendum become more official than a couple of front-page newspaper stories.

CNH: More stimulus, more support

China continues to announce measures to support its economy and boost credit growth, helping riskier currencies and equity markets following a volatile few months. Taxes will be cut “on a larger scale” and monetary policy will be used to support the Chinese economy according to the People’s Bank of China Deputy Governor Zhu.

The wider positivity from these statements has been enough to push AUDUSD over 0.72 this morning and the balance for risky assets that are tied to China remains one of support from notes on stimulus and pressure from wider economic data.

Money supply numbers, plus readings of new loans and financing are due sometime today and will underscore just what a problem credit is in China at the moment.

EUR: German data could show signs of recession

German GDP due this morning will be the first reading for the last quarter of 2018 and comes after a real run of negativity in German data. Some commentators have raised the prospects of a recession in German and France in the coming quarters and, while we think that slightly pessimistic for now, the euro has weakened on the fears.

The euro is also not completely insulated from what happens in Westminster today and while sterling will react the most, a result that points to a no-deal outcome will likely see the single currency in trouble against the USD, JPY and CHF.

Have a great day.