FX Update: Trade deal hopes fading, but what will spark USD volatility?

The US government has moved to sanction Chinese companies, individuals and assets just ahead of tomorrow’s start of US-China trade talks, moves that seem hardly likely to improve the prospects for any comprehensive agreement on almost anything. Besides the US announcement of placing some 28 Chinese companies on the entity list, with eight of those targeted for human rights, the Trump administration also announced travel bans for specific Chinese individuals for their activities in Xinjiang. Finally, the Trump administration was said to be moving on the issue of eliminating holdings of Chinese equities in US federal worker pension funds, among other measures.

Fed Chair Powell was out speaking yesterday and outlined the Fed’s intent to expand bank reserves with the purchase of short-term treasury bills, but was at pains to say that this should not be mistaken as anything akin to the QE programmes of the post global financial crisis era. Estimates are that the Fed will have to bring some USD 150-300 billion of liquidity, and the announcement might come at any time rather than in the c. This latest update from Powell takes away some of the anticipation of tonight’s FOMC minutes release. Elsewhere, Fed voter Evans was out advocating in rather soft language for a further “insurance” cut. Current expectations for a rate cut at the October 30 meeting are around 83%, while I am at 100%.

US President Trump’s team is announcing that it will not cooperate with the impeachment inquiry on requests for testimony and documents, claiming that it is not constitutional, claiming it is only politically motivated, unfair, and an attempt to reverse the result of the 2016 election. This looks like a real political war gearing up that will sap the administration of considerable energy on other fronts.

TRY was offered again this morning after Turkish President Erdogan’s office said that Turkish troops are set to cross the border into Syria “shortly”. Recall US President Trump’s tweet threatening to destroy Turkey’s economy if Turkey does anything “off limits”.

Sterling has stabilized slightly near key levels like 0.9000 in EURGBP and 1.2200 in GBPUSD after selling off steeply yesterday in the wake of Boris Johnson’s statement that a Brexit deal is impossible as long as the EU insists on keeping Northern Ireland in the EU’s customs union.

Australia’s Westpac Consumer Confidence dropped sharply in October by over five points to 92.8, the lowest reading since 2015 and reinforcing the downward trend after a bump in September. There was little impact into the AUD, but historically, confidence is most closely linked to the labour market, which is the RBA’s chief concern in setting policy.

Chart: GBPUSD
Note: just before snapping the below chart, a headline crossed the wires that the EU is ready to allow Northern Ireland to leave the new Irish backstop after a set number of years – which appears a major concession. GBPUSD trading near an important local support level around 1.2200 this morning, awaiting further developments from the last days of negotiations between the UK and the EU and beginning to fear that Boris Johnson’s tactic will be to provoke a No Deal and blame the outcome on others. Traders should be aware of the potential for the price action to pick up sharply in the coming days and weeks as Brexit takes shape – or is possibly delayed in order to give time for elections and possibly even a second referendum.