how-to-make-pips-from-the-brexit-summit

How To Make Pips From The Brexit Summit

The political sphere is set to move the markets this week. 

Monday 15 October is the deadline for Italy to submit their proposed budget to the EU. Then on Thursday and Friday (18-19 October) is the next EU summit and Brexit discussions. 

With all the hype about Brexit, as well as the Italian Budget, these two events are sure to be market movers. 

In this article, we’ll review important events that happened last week. We will also discuss events to look out for in the week ahead along with some trade ideas. 

This week is set to be busy as a majority of the major currencies also have high impact news events scheduled. 

Below are the currencies we will discuss in this week’s article: 

United States Dollar
Canadian Dollar
Euro
Great British Pound
Australian Dollar
New Zealand Dollar
Japanese Yen
Swiss Franc

 United States Dollar

What Happened Last Week? 

The dollar was strong due to US 10yr treasury bond yields staying elevated. On Tuesday the USD gave back some gains as NY traders got back to their desks after the Monday bank holiday. 

President Trump added pressure on the USD with comments about the FED. Trump reiterated that he does not agree with the FED raising interest rates at the current pace. 

The President further explained that rates do not need to go up quickly or fast as inflation is not a problem. This set the stage for Wednesday’s anticipated CPI release. 

Prior to the CPI release, the USD sold off as equities fell rapidly due to fears of rising US interest rates. The US CPI came out softer with both headline and core measures missing expectations.

  

After reaching a 2.9% peak in July the headline CPI YY has slowed to 2.3%. Some analyst forecasts suggest CPI has peaked in July and will continue to slow down until 2019. 

Either way, we need to keep a close eye on US CPI going forward as lower numbers can change the FED’s intended rate path. 

The Week Ahead 

In terms of economic data, the week will start off with Retail Sales on Monday 15 October. After a modest 0.1% growth in August the market is expecting Retail Sales MM to rise to 0.5% in September. 

It’s important to note that the original July print of 0.5% was revised upwards to 0.7%. For this reason, it is very possible the low 0.1% August number could be revised upwards as well. 

The last Consumer Confidence came in at the highest level since September 2000. 

 

Happy consumers tend to spend more. With consumer confidence levels there is an expectation for retail sales to bounce back. Core Retail Sales are expected to remain flat at 0.3%.  

Monday is also the scheduled release date for the US Treasury Currency Report. It will be interesting to see how China is mentioned in the report considering the current trade war. 

On Wednesday 17 October we will also receive the latest FOMC meeting minutes. Not a lot of fireworks are expected for the release. 

According to Danske Bank, there are a couple of things to look out for in the minutes. Firstly, look out for comments regarding the future monetary policy path. 

Secondly, how long the FED is planning to take reducing its balance sheet. Nothing else of significance is expected from the minutes.

Trade Ideas 

The biggest opportunity in terms of data releases will be Monday’s Retail sales. A lot of expectations for continued strong US GDP growth is based on consumption. 

Thus, any big miss or beat on retail sales could impact growth expectations. With the miss on CPI last week a miss on Retail Sales might spur further USD selling this week. 

The FOMC minutes are not expected to surprise but take note of it all the same. 

 Canadian Dollar 

What Happened Last Week? 

The Canadian dollar started last week on the back foot. Lower oil prices and a risk-off tone kept the CAD pressured throughout Monday. 

A slight pullback in the USD and a recovery in oil prices gave strength to the CAD on Tuesday. The recovery was short lived as equity markets continued its sell-off on Wednesday. 

The CAD was the worst G10 performer as the currency was pressured by lower oil prices and a negative risk tone. Friday saw a bit of a reprieve as the risk tone improved after the miss on US CPI. 

The Week Ahead 

Monday will kick off the CAD economic events with the Q3 BOC Business Outlook Survey. The BOC uses the survey to evaluate business expectations of future economic activity. 

The Q2 survey signaled that businesses were very optimistic about the economy. It’s important to note the survey was done before the US started to implement tariffs. 

The Q3 survey might have a misleading read as it will include July to September. The new USMCA was only agreed on 1 October 2018. 

Thus, the report will not include any positive sentiment following the renewed agreement. Scotiabank states a negative reading will probably be discounted due to the timing. 

On Friday 19 October we will also have the CAD CPI data for September. Headline CPI is expected to slow to 2.7% from 2.8%. 

The BOC’s preferred CPI readings are the CPI Trim, CPI Median and CPI Common. The September CPI numbers came out higher than prior and on or above the BOC’s 2% target. 

 

ING expects headline CPI to slow to 2.6%. A BOC rate hike in October is about 90% priced in so softer CPI should not change that. 

The Western Canada Select crude prices fell below US$20/bbl. As a commodity currency, the CAD can be heavily influenced by oil prices.

According to Scotiabank, this poses a risk to the CAD in the run up to the BOC rate decision. But they also explained that one data point should not keep the BOC from hiking rates. 

Trade Ideas 

On Monday look out for the latest BOC Business Survey. A negative report might be discarded as it preceded the USMCA agreement. 

A hawkish report will show that businesses remained upbeat despite previous NAFTA concerns. This could provide a good trade opportunity leading into the BOC rate decision. 

Keep up to date with the WCS crude prices this week, further declines will keep CAD pressured. Similarly, if the price bounces back it will be supportive for the Canadian dollar. 

We are not expecting the CPI release to change the BOC’s rate path. However, a big deviation upwards or downwards can cause short-term volatility. 

 Euro 

What Happened Last Week? 

The Euro started the week on the back foot as Italian budget concerns flared up again. 

EU Commission stated that Italy’s budget is a “source of serious concern” in a letter to Giovanni Tria. In response, Salvini has labeled EU’s Juncker and Moscovici as enemies of Europe. 

Market panic increased when Salvini said Italy will not back down on their budget plans. Italian budget concerns sent Italian 10yr yields up 17.3 basis points. They traded as high as 3.628%.

On Tuesday Italian bond yields reached 3.68% after Tria said Italy will stick to their 2.4% deficit target for 2019. 

However, the Euro finished the week much stronger on the back of a weaker USD. 

The Week Ahead 

On Monday 15 October Italy will submit its 2019 budget proposal to the EU Commission. Danske bank expects the EU will voice a negative opinion and ask Italy to revise its budget. 

We expect the Italian budget concerns and developments to remain a big driver in the EUR this week. According to ING, the Italian budget should continue to put pressure on the EUR. 

The latest EU summit will also take place from 18 to 19 October. 

The market will be focused on the summit to see what Brexit developments will come out of it. Scotiabank explains this could be a “make-it-or-break-it point ” for Brexit developments. 

On Tuesday 16 October we will also see the release of the latest ZEW Economic Sentiment. The Final CPI numbers for the EU will also be released on Wednesday 17 October. 

 

Markets are expecting both CPI YY (2.1%) and Core CPI YY (0.9%) to stay flat from the prior release. Danske Bank does not expect any fireworks from the release. 

With the political issues this week we expect muted reactions from the economic data. 

Trade Ideas 

Keep the news squawk turned on for any political developments with Italy or Brexit. Both these events have the capacity to create lots of volatility and opportunities. 

In terms of data releases, the most important one will be Core CPI YY. In case we see an unexpected downward revision to Core CPI that could provide an opportunity. 

Make sure that any data trades taken are in line with the sentiment from Italian and Brexit politics. 

 Great British Pound 

What Happened Last Week? 

The Pound pulled back sharply on Monday as the prior week’s good news about Brexit faded. 

It was reported that PM May played down the EU’s optimism over a Brexit trade deal. According to sources the PM said there was a big difference between talking about a deal and making one. 

Markets were expecting Dominic Raab to visit Brussels to progress with negotiations. This was seen as an important visit before the important EU summit on 18 to 19 October. 

It was later announced that Raab would not visit Brussels. As a result, the GBP was pressured on Monday. 

Later in the week the Brexit whipsaw in the markets continued as the GBP pared most of the earlier losses. Sterling rallied half a percent as EU’s Barnier said 80-85% of the withdrawal deal was agreed. 

Brexit headlines remained “confusing and conflicting” for the remainder of the week. 

The Week Ahead 

It’s a big week for the Pound in terms of politics and data releases. The main event is the EU summit taking place on 18 to 19 October. 

Positive expectations for a Brexit deal at the summit have been building up in the last week. The Irish border remains the most contentious issue stalling a soft Brexit deal. 

According to ING, there is potential for a big rally in the Pound if a deal can be reached this week. But, for any sustained rally it needs to be a deal that can pass through the British parliament. 

The data releases for GBP will kick off on Tuesday 16 October with the August Jobs report. The market is expecting Britain to have added 20k jobs and for the unemployment rate to stay flat at 4.0%. 

Forecasts are for Average Earnings YY to stay flat at 2.6%. ING expects a decent gain in wages as skill shortages are pushing employers to raise pay.

CPI Numbers

On Wednesday 17 October we will see the September CPI numbers. Expectations are for both the headline and core readings to slow in September. 

CPI YY is forecasted to slow to 2.6% from 2.7% and Core CPI is expected at 2.0% from 2.1. 

 

If CPI does slow as expected it’s important to note that both readings would still be above the BOE’s 2% CPI target. 

The biggest drops are forecasted for the month on month numbers. The consensus sees CPI MM to slow to 0.2% from 0.7% and Core CPI MM slowing to 0.2% from 0.8%.  

On Thursday 18 October we will also see Retail Sales for September. Retail Sales YY is expected to increase to 3.7% from 3.3%. The month on month reading is forecast to slow to -0.3% from 0.3%. After a few booming summer months, ING explains it makes sense for consumption to slow. 

Trade Ideas 

The key driver for the Pound at the moment will remain Brexit sentiment. It’s important to trade any data points in line with the current Brexit tone in the market. 

For example, if the Brexit tone is positive, try to trade data points that have positive deviations. Similarly, if Brexit sentiment is negative only trade data points that disappoints. 

This will offer the highest probability trading opportunities. 

 Australian Dollar 

What Happened Last Week? 

The Australian Dollar started the week rather choppy. With a lack of tier one data points the main driver for the AUD was moves in the USD and risk sentiment. 

As a proxy for risk, the AUD normally depreciates and appreciates based on risk sentiment. Thus, the AUD was pressured as equity markets had their sell-off starting in the middle of the week. 

On Friday commodity currencies found some reprieve on the back of a softer USD CPI release. 

The Week Ahead 

The big question for the AUD in the week ahead will be what happens to the risk tone and equity markets. 

If equities continue their sell-off, we can expect risk sentiment to drive the AUD lower. If equity markets calm down and sentiment improves it will probably drive AUD higher. 

In terms of data, on Tuesday 16 October we will have the release of the latest RBA meeting minutes. No major impact is expected from the minutes.

The RBA maintained a neutral stance at the last meeting. Thus, we expect a muted response from the minutes. 

On Thursday 18 October the Australian Bureau of Statistics releases September’s jobs report. Markets expect the unemployment rate to stay flat at 5.3% and an increase of 15k jobs. 

The biggest event for the AUD this week will be on Friday 19 October with China’s Q3 GDP numbers

 

Australia sends over 30% of their exports to China. This means they are very reliant on a strong and growing Chinese economy.

According to IHS, the market is expecting China’s GDP to have slowed in Q3. The biggest reason for the slowdown is due to the US-China trade war. 

Markets are expecting GDP YY to slow to 6.6% from 6.7% and the GDP QQ SA to slow to 1.6% from 1.8%. 

Trade Ideas 

Take special care with regards to the risk tone in the markets this week. With a lot of political drivers in the mix we might see some whipsaw in risk sentiment. 

Keep a close eye on the Chinese GDP numbers on Friday. A big beat or miss can have a big impact on the AUD. 

Make sure to trade the Chinese data in line with the current risk sentiment. A positive risk tone could do well with a beat on GDP. 

Similarly, a negative risk tone could do well with a miss on Chinese GDP. 

 New Zealand Dollar 

What Happened Last Week? 

The NZD had a very similar start to the week like it’s antipodean peer the AUD. 

With no real tier one data points the NZD was driven by risk sentiment. The NZD had a boost at the end of the week as US bond yields ran out of steam. 

The Week Ahead 

A very important data point lies ahead for the NZD at the start of the week. On Monday 15 October we will see the Q3 CPI release. 

According the ING, the recent dovish rhetoric from the RBNZ makes this report important. The market is still pricing in a 10% probability of an RBNZ rate cut in 1Q19. 

Currently the markets are expecting the CPI QQ to rise to 0.7% from 0.4% and CPI YY to climb to 1.7% to 1.5%. Westpac states that the biggest factor for the expected jump is higher fuel prices. 

The markets were caught off guard by the RBNZ’s sectoral factor inflation print in Q2. The sectoral factor came in at 1.7% which is just below the 2% inflation target. 

Closely watch for changes to the sectoral factor this time round.

It is also important to note that a lot of bad news has been priced into the NZD. 

 

The chart above shows the latest CFTC data for the NZD. At the moment the market is holding the largest NZD short position on record. 

This makes a short squeeze very likely in the case of a surprise beat in CPI this week. 

Trade Ideas 

The RBNZ is more concerned with growth and business confidence at the moment. A beat on inflation could “dent any lingering dovish sentiment“. 

However, a miss on CPI would put one more thing on the RBNZ’s list to worry about and will probably pressure the NZD. 

Be careful of potential short squeezes due to the record net short position against the NZD. 

 Japanese Yen 

What Happened Last Week? 

The Yen started off the week as the market kicked off with a risk-off tone on Monday. 

The two main reasons provided for the selloff was China and Italy.  

China cut its reserve requirement ratio by 100 basis points. Italian budget concerns caused a widespread sell-off in equities. 

This led to panic in the markets and caused risk-off sentiment to boost the JPY throughout the start of the week. The JPY was further supported when the IMF lowered their global growth forecasts. 

On Wednesday the equity sell-off continued which caused JPY strength across the board. According to Reuters the selloff resulted from fears of rising US interest rates. 

The JPY remained supported throughout the week as equity markets were pressured.  

The Week Ahead 

During the week the most important data point for the JPY will be CPI numbers on Friday 19 October. Markets are expecting CPI to edge up to 1.0% from 0.9%. 

According the Wells Fargo, Japan has continued to battle too low inflation. At 1.0% the current inflation is nowhere near the BOJ’s 2% inflation target. 

 

Danske Bank states that cash earnings from summer bonuses have decreased. Growing wages is a big hope for rising inflation and a slowdown in wages means CPI won’t shoot up anytime soon. 

Trade Ideas 

Look out for any further stock market sell-offs in the week ahead. ING states that safe haven flows during the last week were not as prominent as the market is used to. 

If the stock market continues its decline this week be sure to expect further upside for the JPY. 

We do not expect any fireworks from Friday’s CPI numbers. 

 Swiss Franc 

What Happened Last Week? 

The Swiss Franc was one of the more confusing movers last week. Traders consider CHF as a safe haven currency, which means it strengthens in times of risk. 

But not last week. Instead of appreciating on the back of the risk off tone the CHF actually depreciated. 

According to ING, there were no clear catalyst for the weakness in the CHF. Especially considering last week’s risk tone and the Italian budget concerns. 

The Week Ahead 

There are no tier one data points for the week ahead. The only thing of note would be a further decline in equities and risk aversion. 

Also, perhaps the biggest CHF moves for the week is a possible war of words between the EU and Italy. As the EU evaluates the Italian budget there is bound to be a continuation of negative rhetoric 

Trade Ideas 

Watch out for possible risk sentiment movements in the CHF this week. 

With the recent depreciation in the CHF the likelihood of SNB intervention has eased a bit.  

As there are no clear catalysts driving the Swiss Franc at the moment we don’t see any clear trades for CHF pairs. 

Wrap Up 

Highlights for this week focus on both politics and data. 

In terms of politics, watch out for the EU summit as well as the Italian budget submission. 

There is a flurry of important data releases this week. The most important are US Retail Sales, GBP jobs and CPI, NZD CPI, China GDP and CAD CPI. 

Make sure to have your news squawk on and ready to jump when the opportunity presents itself.

Please leave your comments or questions below.

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