- EU/UK breakthrough has finally triggered the GBP rally through 0.8750
- Plenty can still go wrong in Brexit but this is a key breakthrough
- US dollar is broadly bid as US yields have finally bounced back
- Average hourly earnings are the key thing to watch in today's NFP
Some sort of "pay-to-play" deal such as that between the EU and Norway might be the ultimate solution to the UK's post-Brexit trade conundrum. Pic: Shutterstock
By John J Hardy
The EU and UK have finally achieved the Brexit breakthrough that saw a false start earlier this week, as an agreement was finally made that conditions on Northern Ireland would not differ from those on the UK mainland post-Brexit. This has finally triggered the GBP rally through 0.8750 in EURGBP, though I would have expected an even more enthusiastic reaction to this news. Regardless, we have broken down, making the 0.8750 area the bull/bear line for now. There is still plenty that can go wrong in Brexit, but this is a key breakthrough. One imagines that a trade deal will have to involve some sort of flat “pay to stay” fee from the UK side to remain within the customs union, as a soft Irish border means that a tariff system won’t work.
Elsewhere, the US dollar is broadly bid as US yields have finally bounced back and we’ve seen some relief from the brutal flattening of the US yield curve, which some see as a sign of impending US economic weakness, others as due to US corporation pension funds massively front-loading contributions to their pension funds as contributions are tax deductible and this may be the last year under the high 35% corporate tax regime in the US. If that is the case – the first trading days of January could be critical for bond markets to ferret out whether this is the reason for the persistent flattening of the yield curve.
It’s not clear that there is much anticipation into today’s US jobs report, where the market is looking for the +200k-ish nonfarm payrolls, but where the interest is more on average hourly earnings after October’s huge decline to 2.4% – the lowest since early 2016 and likely an anomaly. A bounce-back to 2.7% year-on-year is expected.
USDJPY rallying back through the key recent pivot above 113.00, setting the sights firmly on the range top into 114.50, provided the US jobs report today cooperates and keeps bonds under pressure after yesterday’s reversal there.
The G-10 rundown
USD – not entirely sure that the market will be particularly reactive to today’s jobs data – the USD outlook looking very much up within the G3 as EURUSD has broken down through 1.1800 and USDJPY is up through 113.00+ resistance. These moves look capable of extending if the US jobs report doesn’t provide any nasty surprises.
EUR – the euro doubly under pressure from a strong US dollar and resurgent sterling – may be room for further consolidation as nothing expected from the ECB next week.
JPY – the JPY very weka on the bounceback in yields while risk appetite has stabilised and then some over the last couple of days. Watching 114.50+ in USDJPY for potential higher.
GBP – getting a bit more traction as we are writing this morning’s report on the breakthrough in Brexit negotiations – mostly interested in GBP strength via EURGBP, GBPJPY and GBPCHF in this environment.
CHF – the franc back on the weak side again as higher yields and risk appetite are a negative. USDCHF through its next layer of resistance and not far from parity again – largely akin to the 114.50 area in USDJPY and the potential for the two pairs likely very similar unless the BoJ surprises at its meeting the week after next.
AUD – The Aussie reaching new lows versus the hard-charging greenback, but less vulnerable broadly than previously as EUR and JPY especially have weakened.
CAD – a complete rebound in USDCAD since the downbeat Bank of Canada meeting and selloff in oil – keeps the needle pointed higher for a test into 1.3000.
NZD – AUDNZD still trying to stay credible for downside interest, though the local pivot hasn’t given way. For NZDUSD, the focus on downside pivots as the pair has coiled within the range and is testing the ascending line of consolidation. Prefer NZD lower there if US jobs report cooperates, but focus on other USD pairs at the moment.
SEK – the reaction to the Riksbank’s Ingves recent comments (more of the headscratching variety) has been entirely erased, but 10.00 has proven a tough nut to crack and the euro is weaker elsewhere – the critical test for the coming month or more will be the December 20 Riksbank meeting.
NOK – Norway’s CPI up on Monday and Norges Bank next Thursday. EURNOK has toyed with the downside pivot zone 9.75-9.80, but remains in suspense – though a weaker Euro elsewhere likely helping at the margin for downside potential if that zone does break.
Upcoming Economic Calendar Highlights (all times GMT)
- 0930 – UK Oct. Manufacturing Production
- 0930 – UK Oct. Visible Trade Balance
- 1330 – Canada Nov. Housing Starts
- 1330 – US Nov. Change in Nonfarm Payrolls
- 1330 – US Nov. Unemployment Rate
- 1330 – US Nov. Average Hourly Earnings
- 1500 – US Nov. Final University of Michigan Confidence
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank