FX update – Sterling centre stage

GBP/USD, H1

A sleepy market was stirred by a drop in the Pound, prompted by reports, initially by the FT, that the UK government is planning to unpick parts of the withdrawal agreement that was signed with the EU in January, including elements of the special arrangements for Northern Ireland that are legally binding. A government source cited by the Guardian newspaper said that the move would likely derail this week’s round of trade negotiations with Brussels, while a spokesperson downplayed the move as being a “fallback option” in the event a deal can’t be reached. PM Johnson set October 15th as the deadline to reach an agreement with the EU on trade, stating that the UK would “move on” in the event of a no-deal, which would be a “good outcome.” Overall, this ups the ante — making the no-deal threat tangible. Regular negotiations between the respective sides’ representatives Frost and Barnier are now likely to be rendered useless (if they weren’t already); political leaders on both sides of the Channel will be deciding the Brexit endgame.

Cable dropped just over 0.69% to a 1.3175 low, to test post-payrolls 11-day low that was seen on Friday at 1.3174. EURGBP rallied by over 0.60% in printing a one-week high at 0.8978. The Pound saw a similar magnitude of declines against other currencies. Elsewhere, the Dollar and other currencies have been plying narrow ranges in thin, early-week trading. The Dollar saw an up-then-down price action in the wake of the overall better than expected US August jobs report, which saw yields rise across the curve in a steepening shape. The Dollar might have rallied more were it not for the Fed having recently codified the lower-for-longer rate protocol, and Fed Chair Powell assured, after the data on Friday, that the Fed won’t prematurely withdraw support while noting that the recovery will “get harder from here.”

USDJPY has continued to ply a narrow range in the lower-to-mid 106.00s. The 106.00 level roughly marks the midway point of the range that’s been seen over the last month. Most yen crosses have settled after dropping quite sharply amid the Wall Street-led tumble in global stock markets, which elicited a degree of safe haven demand for the Japanese currency. In the bigger picture, most yen crosses have been trending higher since May, with the Japanese currency tracking inversely with global stock market direction. The Yen is likely to remain apt to directional change on the back of shifting risk premia in global markets. Backed by a surplus economy, and one where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, the Yen has a profile of being a low-beta haven currency. With risk appetite among market participants high, fuelled by massive monetary and fiscal stimulus efforts worldwide, the Yen has been trending lower (ex USDJPY). This looks likely to remain the case for now.