FX Update: Sterling backs up on stumbling BoJo. Risk rally smacks USD, JPY

Trading interest

• Taking profit on EURJPY shorts rather than holding for bigger move.
• Abandoning USDCAD longs on the mood shift.
• Maintaining AUDNZD longs with stops below 1.0570 for 1.0950

UK Prime Minister Boris Johnson is losing control of the Brexit process as Parliament today vote and likely approve a forceful extension of the Brexit deadline to next January if no deal is agreed ahead of the October 31 deadline. Boris Johnson has vowed to call snap elections for October 14 on this vote passing, but may not get what he wants, meaning we further extend Brexit uncertainty over the horizon (later elections and/or a second referendum) while he stumbles along with what is now a weak minority government with several Conservative MPs set adrift for sabotaging Johnson’s. Before we take the big relief rally as a sign of greater things to come, however, let’s consider whether yet another extension of Brexit will do the UK economy any favours and how this still feeds into the risk of an eventual Corbyn government in an election scenario. Our Steen Jakobsen penned an excellent piece on Brexit yesterday, calling it a “never-ending story” that will continue to drive sterling weakness. 

In early European hours this morning, a generally positive tone in Asia improved further and sharply so on the news that the Hong Kong leadership will move to formally withdraw the controversial extradition bill. As well, signs of a softer tone on Hong Kong from China added support for the recover in sentiment. The last puzzle piece for improving global sentiment further would be the US and China agreeing to sit down for trade negotiations.

A weak US August ISM Manufacturing survey (49.1) yesterday suggest a manufacturing sector on the verge of a recession. This may have driven the slight yield curve steepening yesterday as the market prices in higher odds of further Fed easing, comments from known hawk (and dissenter to the latest FOMC rate cut) Rosengren yesterday notwithstanding.

Chart: AUDJPY
A classic barometer of risk like AUDJPY may offer a high beta exposure to the last sentiment shift, particularly if a consolidation in bond markets sets in and if the US and China manage to set a date for trade negotiations. Plenty of room for a consolidation here without reversing the downtrend – possibly back toward 74-75.00 if an improving mood lasts for more than a few days.