FX

UK parliament rejects “No Deal” Brexit and other hard Brexit options

_{Posted on Mar 14, 2019}

PM May prepares for 3rd vote on Brexit as UK parliament rejects “No Deal” Brexit and other hard Brexit options

Cable rallies over 300pips overnight (hits a 1.3380 high) as the UK parliament emphatically rejects a “No Deal” by voting twice – first to reject no-deal Brexit for the 29 March deadline and then in a second amendment, completely (rejecting the Malthouse compromise” amendment that calls for an A50 extension until 22 May to prepare for no-deal).

Press reports this morning indicate PM May is preparing a third vote on her Brexit deal after holding secret compromise talks with the DUP and Brexiteers, the Times reports, citing unidentified people familiar with the discussions. Tory lawmakers who have voted against the earlier deal are seen having private talks with Brexit secretary Stephen Barclay and attorney-general Geoffrey Cox over possible changes to legal advice to allow Tory MPs and DUP to support PM May’s deal in the event of another vote. The Times reports that under a potential deal, the government could legislate to grant the UK parliament the power to unilaterally pull out of the Irish backstop should lawmakers determine the arrangement has become permanent.

Dollar Index back to sub 97.00 on subdued inflation outlook

The USD Index (DXY) sees a steady decline from Asian session highs near 97.0 over in the NY session towards 96.40 with Brexit developments and sterling strength the main driver but also including US developments – US growth indicators such as construction spending (+1.3%Mom in January versus 0.5% expected) and core durable goods data (+0.4%MoM versus -0.4% consensus) outperforming but inflation indicators remaining lackluster with core PPI rising just 0.1% versus 0.2% expected and combined with Tuesday’s CPI, likely leaves PCE inflation (Fed’s favorite measure) subdued and allows the Fed to be patient with further rate hikes.

The 2 day BoJ board meeting starts today. Citi analysts expect the 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. While JPY investors will watch the BoJ, attention will also be on seasonality factors that typically help drive the Yen to strengthen in the second last week of March due to comprehensive hedging operations by Japanese exporters ahead of Japan FY end on March 31.

UK parliament rejects “No Deal”; Stronger than consensus bounce in euro zone industrial production suggests worst may be over

The UK parliament’s rejection of a “No Deal” Brexit sets up for a government motion tonight that if passed, would see next Wednesday as the final date to pass a deal and which implies a third meaningful vote on PM May’s Brexit deal. If the 3rd meaningful vote passes next week, then the government could request an extension of Article 50 until 30 June to implement the deal.

Alternatively, the motion for a longer extension would be necessary and EU elections would need to be held in which UK parliamentarians will participate, something that has been a key concern of hard Brexiteers. Theresa May’s hope might be that the prospect of a long extension gets the ERG and DUP (the hard Brexiteers) to vote for the deal next Wednesday.

Longer extension right away? – But even if they do not, and a longer extension is sought right away, this would allow potential soft- or no-Brexit scenarios such as negotiating deeper relations with the EU or even a second referendum or perhaps even snap elections. BOTTOM LINE – Almost all scenarios (with perhaps exception of snap elections) now potentially point to sterling friendly outcomes.

Eurozone Industrial production (IP) for January rises 1.4%MoM, a big beat on the 1.0% consensus, and a strong rebound from December’s print of -0.9%. EUR shows little reaction even as IP is 0.4% above the Q4-2018 average and the gains are seen in all subcomponents (intermediate goods, energy, capital goods, durable consumer goods and non-durable consumer goods) and with gains widespread across almost all euro zone members with the exception of Germany. Citi analysts comment - “We think the worst is probably behind us in terms of euro zone IP, with surveys continuing to suggest that the level of order books remains high compared to the stocks of finished goods. There continues to be a solid case in favor of IP growth re-accelerating should worries about global trade (US-China trade conflict and Brexit) dissipate.

Australia - household sentiment retreats but not at levels to warrant RBA rate cuts

Australian household sentiment falls back into negative territory with the W-MI measure of monthly consumer sentiment declining 4.8% in March and driving sentiment in negative territory to 98.8 points. However, Citi analysts believe consumer sentiment is not yet at a level that corresponds to rate cuts…at 98.8 points, sentiment is roughly 4 points above readings that have been followed by interest rate cuts in the past…and neither is business sentiment with the NAB business survey showing business confidence down by 2 points to a level of 2. This remains slightly positive and history shows this needs to be flat to negative ahead of interest rate cuts.

Trump confirms Lighthizer's tone on US – China trade talks

US Trade Representative Lighthizer’s Tuesday comments he sees "major issues" to resolve and does not know what would be the end result are followed by a more optimistic tone from President Trump overnight but who also says he is not in a rush to make a deal. Markets await today’s China industrial production data (Citi expects deceleration to 5.5%YY in Jan-Feb) and retail sales (Citi at 8%YY).

This is an extract from the Daily Currency Update, dated March 14, 2019. Please approach a Citigold Relationship Manager if you would like more information