Good morning,
Queasy on a Sunday morning
We are back to a point wherein the weekend political news and the front pages of the Sunday papers are crucial for the outlook for sterling over the course of the next week. So far, sterling has started the week poorly following a Sunday Times interview with Brexit Secretary David Davis who stated that “We don’t need to just look like we can walk away, we need to be able to walk away. Under the circumstances, if that was necessary, we would be in a position to do it.”
His ire is mainly centred on the amount of the ‘divorce payment’ that the UK is expected to pay the EU; something that both parties have agreed needs to be settled alongside other important issues such as the Northern Ireland border and the rights of each other’s citizens living in the other’s countries before we start talking about trade.
Estimates are all over the place as to how much the UK ‘needs’ to pay with some calculations as low as EUR5bn and some twenty times that.
GBP lower as traders bet on volatility
The EU will meet in Brussels today and while the meeting is ostensibly about the Greek bailout package you had better believe that traders will be looking for some headlines about the EU’s stance on Brexit. Movements in Asia have suggested that investors have increased bets on how volatile the pound will be over the course of the next month and, subsequently, the pound has been pressured a little lower.
Election news over the weekend was very much by the numbers with focus mainly falling on the shrinking deficit between the Conservative and Labour parties in the polls. While Theresa May’s lead had been as much as 20% when campaigning began, that has now fallen to around 9% in the average of polls.
Theresa May will be interviewed on the BBC today at 7pm.
Trump sell-off overdone in the short term
In dollar markets the news from Washington is capping USD gains; there is little incentive to acutely buy into USD strength if one believes or fears that additional and likely increasingly strange revelations may emerge. Similarly, unless there are fresh allegations we cannot foresee the dollar getting taken on; comments from the Federal Reserve and its members have kept eyes focused on June as time for a fresh rate hike.
Pressures from the Trump trade are being felt once again in the Chinese yuan with options markets showing that investors are prepared to pay more to protect against weakness in CNH over the next 3 months. For now USDCNH remains around 6.87 with 12 month forward prices still taking CNH buyers well over the 7.00 mark.
Elsewhere
Today’s data calendar is rather on the quiet side and we will have to wait and see what the headlines from Brussels look like.
Have a great day.