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FX

Defeat for PM May But Sterling Rebounds

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Defeat for PM May But Sterling Rebounds   

  • The UK Parliament hands PM May one of the worst ever defeat for a sitting UK government, rejecting her Withdrawal Bill by a margin of 230 (432 against and 202 for it). GBPUSD hits a low at 1.2670 on confirmation of the vote only to rebound to a close around 1.2870.

 

  • After the Brexit vote: 2 possible outcomes from here – (1) Uncertainty has increased but the rebound in sterling following the result is on expectations that a No Brexit and never Brexit are now seen more likely as a ‘no deal’ is not supported by the PM, and Parliament will do everything to prevent it. The probability of Article 50 extension is now also very high (this perhaps is the most likely outcome) and the stock of Article 50 revocation is rising too. (2) A more negative scenario for sterling would be if PM May quits – Following this defeat, PM May will likely struggle to gather cross-party support for a new approach. Chances of her stumbling soon have grown and her departure would likely see a negative knee jerk reaction in sterling especially if she is replaced by a new tough anti-EU leader, raising the likelihood of a disruptive EU departure. Alternatively, with or without PM May, Parliament could form a “national unity government” and work towards a softer Brexit or second referendum but with an uncertain outcome and it may not last: early elections are also possible, bringing an increased chance of a Labor government under Jeremy Corbyn – all potentially negative for sterling.

 

 

EUR : Continuing weakness in euro zone weighing on euro                                    

  • German GDP falls as expected to 1.5%YoY in 2018, with declines seen in exports (growth rate down from 4.6% in 2017 to 2.4% in 2018), private consumption (1.8% to 1.0%) and government consumption (1.6% to 1.1%). While not in recession, the slowdown especially in exports is of particular concern to investors given Germany has had to contend with the China slowdown, trade tensions with the US and domestic issues such as the WLTP changeover and a Rhine drought (the last 2 being temporary factors but dragging out the slowdown). The data sees German leading indicators cooling to levels consistent with below-trend growth rates. However, with Germany’s budget surplus climbing from 1.0% of GDP in 2017 to 1.7% in 2018, this potentially gives Germany ample space to expand fiscal stimulus.

 

 

Asia EM: China’s stimulus measures may be starting to take effect                                    

  • Chinese policy officials are looking to target further fiscal stimulus measures by announcing “tax cuts on a larger scale” while the first tranche of the PBoC RRR cut comes into play yesterday, along will a huge liquidity injection of CNY80bn.

 

  • Data released yesterday suggests Chinese stimulus measures already announced may be starting to take effect (something the broader market is yet to take note off). China’s December money supply growth (as measured by M2) comes in line with consensus expectations but credit growth is higher than expected on both measures – new yuan loans up CNY1080bn vs 825bn consensus forecasts and aggregate financing also well exceeding estimates at CNY1590bn in December.

 

 

This is an extract from the Daily Currency Update, dated 16th January 2019. Please approach a Citigold Relationship Manager if you would like more information

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MARKET SPECIFIC DISCLOSURES

Market Specific Disclosures

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