Sterling voters vote no on May’s 'new' deal

UK Prime Minister Theresa May will try to reintroduce her deal for a fourth vote, with the deal this time including a number of promises on a temporary customs union deal and other details and even offering a second referendum on the deal should it pass. The market tried to gin up a reaction on the word referendum and sterling tried to rally on the news.

Commentators are divided on the reasoning behind the vote, but perhaps the move was aimed at bringing enough Labour Remainers who fear that if the UK doesn’t get May’s quite soft Brexit deal, the process risks dramatically raising the odds of a No Deal Brexit. But the obstreperous reaction from nearly all sides in the wake of May’s presentation of the new deal suggest, as John Authers puts it, that the deal is “already an ex-deal”  and “as dead as John Cleese’s parrot”.

It appears that the mostly likely course from here is the eventual calling of elections after May bows out in disgrace after the vote on the deal most likely fails in early June. The overriding fear then is that this leads either to a hard Brexit or a Corbyn government – neither of which looks sterling friendly. Perhaps a negative pall over Europe and the euro over the EU Parliamentary election could keep EURGBP below 0.8800, perhaps not, but the pressure on GBPUSD could quite possibly rematerialise for a run at the 1.2500 support and then some.

Elsewhere, the market continues somehow to maintain a positive mien on general risks from the US-China trade showdown as US equities managed to close with a solid gain yesterday after the US offered a 90-day exemptions on the implementation of the Huawei ban that could be seen as an attempt to salvage the process.

The rhetoric from the Chinese side, meanwhile, has taken on even more dramatic posturing and the latest theory is that China could seek to limit exports of its rare earth resources, so important in many technical and military applications. The market seems staggeringly unconcerned – I still struggle to understand the US equity market and the complacent risk spreads elsewhere (like corporate high yield and emerging markets), which have widened modestly, but are hardly flashing red. A look at emerging market equities, however, does suggest strong concern, however, so there are divergences. 

Tonight we get a look at the latest batch of FOMC minutes, but the market is so keyed into the risks of the US-China trade headlines that it is hard to see what news these could bring. Every attempt to gin up a reaction to the Fed’s dovish shift since the watershed Powell shift in Januray has failed to sustain a USD weakening for any appreciable length of time.

Trading interest

Short AUDUSD and EURUSD, but looking to abandon if no further progress ahead of the weekend.
Long AUDNZD for a strategic trade with stops below 1.0400 for a move back toward 1.1200

Chart: EURUSD

EURUSD has traded within 30-40 pips of its recent cycle low ahead of the EU Parliamentary elections starting tomorrow and the flash May PMI’s out tomorrow. Some of the recent EU lending data suggest some significant further weakening is baked into the cake and the ECB is pushing on a string and has no mandate to expand its support for the economy. The question is whether traders are particularly interested in sending an already weak euro over the edge, with so much focus on China’s plans for its currency.

We’re sceptical that the downside momentum will impress unless we see a dramatic escalation of peripheral spread widening on the EU elections results (doubtful – these are more likely to show a general euro-skeptic malaise from both sides and evacuation of the political centre) or a move by China to allow the CNY to fall. Without either of these, EURUSD may only be able to move to 1.1000 or so on a run lower.