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Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 19 February 2016 at 9:12 GMT

From the Floor: The ties that bind Britain

Head of Editorial Content / Saxo Bank
Denmark
  • EUR, GBP on defensive as Brexit talks continue
  • Market cannot take four Fed hikes: Hardy
  • Bond yields slide lower as risk sentiment dries up
  • Air France-KLM posts earnings beat, surprising analysts

SaxoStrats
By Michael McKenna

Although the talks surrounding the European Union's "anti-Brexit" deal continue to drone on, depressing both sterling and sentiment, investors are taking comfort from EU Comission head Jean-Claude Juncker, who told press yesterday that he remained "quite confident" that a deal would ultimately be inked.

Juncker, of course, is the famously anti-democratic politician who on the eve of the French referendum over the EU constitution told reporters that "If it's a Yes, we will say 'on we go', and if it's a No we will say 'we continue’".

On another occasion, speaking about European Central Bank Policy, he said that "I'm ready to be insulted as being insufficiently democratic, but I want to be serious... I am for secret, dark debates".

Given all this, it might almost seem as if Juncker's confidence is that of someone who already knows the outcome, but it's been a funny sort of year for that sort of political convention. US Republican front-runner Donald Trump, after all, is fighting with the pope right now. And Juncker himself, during Greece's 2011 crisis, said that "when it becomes serious you have to lie".

So who knows? Not sterling traders, who remain on the defensive as the fog in the channel threatens to cut off the continent completely. "It's rather uncertain when we will get an announcement here", says Saxo Bank head of FX strategy John J Hardy, who adds that the GBP is "all over the place", with the cable taking full advantage of a roomy, 1.43-1.435 range ahead of the decision.

The uncertainty, continues Hardy, is weighing on the euro's fortunes as well, but a deal will likely switch the narrative to one of euro weakness as traders set this latest hurdle aside. 

"If we get below 1.10 [in EURUSD], there'll be catch-up trading", he says.

EURUSD

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Source: Saxo Bank 

On the other side of that trade, of course, lies the once-mighty (and still reasonably robust) greenback, whose fortunes may be swayed by Federal Reserve voter Loretta J. Mester's remarks today.

Mester's address comes on the back of the San Francisco Fed's John Williams saying yesterday that he remains committed (although he is not a Fed voter) to the policy normalisation schedule initiated with December's rate hike.

"If there's anything the market is not prepared for, it's four Fed hikes," cautions Hardy.

With Asian bourses and emerging markets under pressure this morning, much of yesterday's risk-on romp has been curtailed, and bond yields have joined the retreat.

"We are sitting below a 0.2% yield on the 10-year german bund" says Saxo bank fixed income trader Michael Boye, adding that expectations of further ECB stimulus are also working their way through this market.

In corporates, Boye says that Air France-KLM's positive earnings surprise – the company has returned to annual profitablity for the first time in several years – is shining its light on the company's 2020 euro-denominated perpetual bond, which features a yield of 8%.

The company's turnaround, adds Boye, is largely due to low oil prices, with Boye noting that "this is proof that [low crude price levels] are good for something".

This, we suspect, is going to be a key theme in markets over the short- to medium-term. Investors will be hunting for those specific sectors and companies that benefit from some aspect of the low-growth, low-commodity price cicumstance that is weighing on financial markets as whole.

What instrument rallies when Europe produces yet another frustrating, pallid but ultimately not-the-worst-case-scenario deal? We thought it might be a Greek equities ETF last summer, but you know how that went.

Greece
Turned out a vacation would have been the better... vehicle, 
but forest for the trees and all that. Photo: IStock 

Michael McKenna is an editor at TradingFloor.com

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Editor’s note: From the Floor takes advantage of TradingFloor.com's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios

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