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Daily Market Brief

Watch for GBP recovery rally

(Peter Rosenstreich, head of market strategy)

 

The initial UK Supreme Court ruling indicates that Article 50 will need parliamentary approval. The court has ruled out the need for approval from Scotland, Wales or Northern Ireland. From a currency trader’s perspective, this really is a mixed picture. MP May will now be able to push through a Brexit strategy without the added complexity of demands from Pro-EU Scotland, Wales and Northern Ireland. In our view, the ruling should be marginally GBP positive as it further increases the likelihood of a “soft” Brexit. However, in order for PM May to get the House of Parliament votes to trigger Article 50, she and her government will have to compromise the terms of their Brexit strategy. The GBP knee jerk reaction was clearly a sign of disappointment however, once markets realise that a “hard” Brexit is less probable, GBP should recover.

 

Confusing US Trade Policy

(Peter Rosenstreich, head of market strategy)

 

President Trump's first full day in office was as confusing as his astonishing rise. Trump officially withdrew the US from the TPP deal (watch for the rise of the China-led Regional Comprehensive Economic Partnership), while Stephen Schwarzman, White House economic advisory committee chair said that Canada was not the target of NAFTA renegotiations. Mr. Schwarzman underlined Canada’s “very special status”, which was positive to say the least for a nation that exports 75% of its goods & services to the USA.  However, the overall interpretation of recent events is that Trump's trade policy is completely “from the hip.” Protectionist policy setting with flexible ideology makes foreign exchange trading extremely uncertain. We are holding our midterm view that Trump's fanatical claims, focused on a pro-growth agenda, are unlikely to meaningfully materialize and that three 25bp Fed rate hikes are generally priced in therefore a rally in USD is an opportunity to reload shorts. In addition, US Treasury Secretary nominee Mnuchin's warning over USD strength should dictate real policy (contrasts with supporting a strong USD policy last week) since if a nation is gearing up for a trade war, a strong currency is unlikely to be an asset. While we wait for Trump’s next policy-related tweet, US Manufacturing PMI and existing home sales should provide further evidence of a healthy US economy.

 

UK Supreme Court to set the rules on Brexit

(Arnaud Masset, market analyst)

 

The pound sterling started the week on solid footing and took advantage of a sell-off in the greenback as GBP/USD rallied 0.60% to 1.2450. In fact, the pound has surged more than 4% over the last seven days as Brexit fears ease on the back of Theresa May’s pacifying speech. Nevertheless, it may be just the beginning of a broader move should the UK Supreme Court validate the judgement of a High Court ruling which obstructed the so-called “royal prerogative”. On Tuesday at 9:30 GMT, the court will state whether the government has the authority to trigger Article 50 without a parliamentary approval. Even though Theresa May has already promised that MPs will have to vote on Brexit before starting the negotiation, a rejection of the government’s appeal would definitely trigger a relief rally in the pound as the government will most likely take a softer stance. With most MPs being Europhiles, they will undoubtedly try to negotiate a relationship which resembles full-EU membership as closely as possible.

 

Brazil’s inflation outlook continues to improve 

(Arnaud Masset, market analyst)

 

On Monday, the Brazilian central bank (BCB) released its latest weekly economist survey. The report showed that the central bank expected inflation to decelerate at a faster pace than anticipated as the main inflation gauge, the IPCA, is anticipated to reach 4.71% by year-end compared to 4.80% last week and 4.85% a month ago. As such, they also lowered their expectations for the year-end Selic rate level. The BCB’s benchmark rate should ease to 9.50% by the end of 2017, which is 3.50% lower than the current level of 13%.

 

All in all, even though the survey showed that economists did not expect growth to pick up, the broader picture keeps improving in Brazil and will sooner rather than later start to translate into firmer growth and increasing investments. Indeed, after reaching a multi-year low in 2016, foreign investments should continue to pick up against the backdrop of fading risk aversion and improved growth prospects. In addition, the downward pressure on yields should help Brazilian companies to attract fresh money as investors gradually turn their backs on Brazilian treasuries in search of higher yields. On the currency side, the Brazilian real should also profit from this new dynamic. USD/BRL will continue to move south as investors ride the still profitable carry trade and start gradually increasing their exposure to the Brazilian economy.

 

Markets await the Turkish Central Bank today 

(Yann Quelenn, market analyst)

 

The CBT is on the edge and needs to act in order to defend the lira. Today, its rates decision is likely to confirm an intervention. Until now, it seemed as though the central bank were simply letting devaluation continue. Since January 2016, the lira has lost 35% of its value against the US dollar without any major intervention from the CBT. The repurchase rate is expected to increase by 50 basis points and the lending rate by 75 basis points.

 

Too light an intervention today will disappoint financial markets and we know that Erdogan would like to keep rates low claiming that the Turkish economy is under attack. Indeed, the cost of holding the Turkish lira must be remunerated even higher as major political uncertainty still hangs over the country with the state of emergency being extended a further three months. Moreover, Turkey’s strong reliance on foreign energy means that higher energy prices associated with a stronger dollar are certainly putting additional pressure on the troubled economy. Finally, rating agency Fitch will likely downgrade Turkey’s credit rating. We remain long USDTRY.

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Tuesday, 24 Jan, 2017 / 1:28

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