FX

Brexit developments overnight - Another Chance For PM May?

_{Posted on Mar 15, 2019}

-->Brexit developments overnight - Another Chance For PM May? US – China trade – Trump – Xi summit now likely delayed to April end

PM May gets her way – the UK Parliament overnight approves the government’s Brexit delay motion by 412-202 votes that would allow it to seek an Article 50 TEU extension until 30 June if Parliament passes PM May’s deal in a third meaningful vote before next week’s EU summit. If not, a longer extension could become necessary. And contrary to the day before show of force, pro-EU MPs fail to take control of the Brexit process overnight as the government secures a narrow 314-312 defeat for the Benn amendment, which would have started a process towards indicative votes (ie. allowing MPs to vote on alternate Brexit strategies). MPs may get this from the government, however, if PM May’s deal is rejected again next week. A second referendum is also rejected – MPs vote against an amendment to hold a second referendum by 334-85 as Labor and pro-EU Conservatives abstain. This confirms that a second referendum remains an unlikely scenario for now.

Trump – Xi summit - Press reports indicate the Mar-a-Lago summit may now take place at the end of April, if it happens at all, according to a source. President Trump adds, “President Xi saw that I’m somebody that believes in walking when a deal is not done and, you know, there is always a chance that could happen.” The Citi analyst base case remains for a preliminary trade deal, focused on trade rebalancing, as well as some commitments on intellectual property protection and higher market access for US firms, among others.

USD better supported overnight due to short term CNY weakness

CNH weakness is the main driver of USD support overnight following weaker Chinese data (refer Asia EM strategy) and US – China headlines of a likely further delay in the Trump – Xi meeting. Data out overnight shows US new home sales in January (release delayed by the government shutdown) unexpectedly declining -6.9%Mom vs +0.2% consensus forecasts. The data reflects the weakness in housing into the end of 2018 but the more forward looking indicators are already starting to show a recovery in line with Citi analyst expectations.

The BoJ board meeting concludes today. Citi analysts expect BoJ to remain reluctant to announce any additional stimulus. Nevertheless, BOJ officials expect both Japan exports and production to remain weak in Q1, with the focus firmly on how weak global demand weighs on capital investment.

Overnight Brexit developments likely to offer reassurance to sterling investors

GBPUSD’s drop from a 1.3365 high in late Asian / early London time to near 1.3200 comes on the back comments by a traditional PM May ally (George Freeman MP) who publicly calls for May to resign once the Withdrawal Agreement is passed. However, this is not new news but more importantly, she is unlikely to leave until she can get a Brexit deal over the line - this is likely supportive for sterling.

Next steps – It is highly likely PM May calls for a 3rd Meaningful Vote (MV3) in coming days (by March 20). The ERG group within the Conservative Party (a group of 60 – 70 hard Brexiteers who have earlier voted down both of PM May’s Brexit proposals) and DUP (Tories coalition partner from Northern Ireland) confirm they are now examining whether Attorney General Geoffrey Cox could change their views of May's deal with further legal advice. If the deal passes at the MV3 next week, then PM May is likely to request a short extension to May 23/ June 30 to enable the UK and EU to complete the required legislation to pass Brexit.

On the other hand, should PM May decide not to call for a third meaningful vote due to a lack of support for the deal, then she could instead, request a much longer extension period to allow time to find an alternative approach to Brexit. BOTTOM LINE - While an extension (whether short ort longer term) still requires EU agreement (and indications from the EU are they will likely accede to the UK’s request), the overnight developments should offer reassurance for GBP investors.

Chinese data enjoys stable start; Singapore - mixed data but much closer call on MAS’s April meeting

Chinese data releases yesterday and events today – (1) Industrial output rises a weaker than consensus 5.3% in the first two months of 2019 (versus 5.6% expected). (2) Fixed asset investment growth picks up to 6.1%YoY in 2M19, up from 5.9%YoY in 12M18, largely in line with market expectations (Citi/Mkt: 6.0%/6.1%). (3) MI growth drops from 9.5%YoY in 12M18 to 5.9%YoY in 2M19. Weak industrial profit growth and lingering trade uncertainty appear to be the reasons behind the soft MI. (4) REI growth accelerates unexpectedly from 9.5%YoY to 11.6%YoY. (5) A new law likely to be signed today that sees both domestic and foreign investors treated equally, a prerequisite toward cooling trade tensions between Beijing and Washington as it intends to ban forced technology transfers.

Singapore: Rise in 4Q final unemployment rates, but unchanged from prelim estimates – Singapore’s resident and citizen unemployment rates are unchanged from the preliminary numbers at 3% and 3.1% (3Q: 2.9% and 3%) respectively and still broadly in line with what Citi suspects is MAS’s estimated NAIRU of around 3 – 3.5%.

Data is consistent with the recent less hawkish MAS tone but the MAS call in April is still a much closer call - Overall, jobs and recent PCE data suggest domestic inflation pressures from wage costs have dialed back a notch vs MAS Oct’18 assessment and the path of least resistance may now be for a pause in April. However, this is a much closer call given near 2% inflation alongside a continued bias for a strong SGD. Much will also hinge on whether the current 1% slope is still deemed accommodative.

This is an extract from the Daily Currency Update, dated March 15, 2019. Please approach a Citigold Relationship Manager if you would like more information