Trade Week Ahead - Shut It Down

21 January, 2019

USD: I remain net short through DXY. However, there are a few events in the short term that could see a short bounce.

First is the government shutdown; which is showing no real sign of it being resolved any time soon. However, the reason for highlighting it from an FX point of view is there are several pieces of economic data that haven’t been released due to the institutions that provided the data being closed.

Retail Sales, Housing data and some other specific economic monthly data are currently backing logged due to the shutdown. The USD thus is trading free of this information – going on passed government shutdown this data will be released and released relatively quickly once the government is back up and running – the USD will have reposition on this missing market data.

The second is news that China may purchase large amounts of US exports in an effort to shrink the trade balance a part of a possible US-China Trade deal.

While a significant increase in export demand is a for any currency a positive, a China trade increase presents other FX challenges specific to the USD:

1. Chinese imports from third countries in the main are priced in USD. Thus, to find a USD positive China would need to see “recycling” flows.

2. Also, an easing trade conflict would be a boost for global sentiment, which would be a downside weight on the USD as EM currencies would jump up.

Thus continue to expect USD downside on the ‘pausing’ Fed and a slower growth profile having peaked in 2018. Will be monitoring the outcomes of the US-China trade negotiations closely on a short term basis.

GBP: As expected the Withdrawal Agreement was emphatically defeated last week, and as expected a ‘no confidence’ motion also failed, net GBP positive. Next steps are clearly underway: cross-party talks have begun, and possible solutions are being mooted that would find a majority in Parliament. The consensus is growing that Brexit will take a softer position, like that of a Norwegian-style EU position.

The second vote on the Withdrawal Agreement is early this week. It is likely to fail again however, the base case is an exit and one that is likely to be EU focus. The view is the GBP will appreciate on a net base over the coming months.