Originally published by Pepperstone
We live in a deadline-driven world
There seems plenty to focus on in markets right now, and as each day goes by, we get closer to key deadlines imposed on binary events such as Brexit and US-Sino trade tensions. Deadlines are a bit of a thing in markets these days, although in the case of Brexit we have our major deadline of 29 March, and have a series of minor deadlines in the lead-up that could ultimately shape the binary nature of the UK's relationship with the EU on the Brexit deadline.
It's no surprise to see GBP/USD below 1.28 when we look at Theresa May having her 8th government defeat through the Brexit process, with the Commons voting 303 to 258 against her notion. Trading GBP comes with higher risk than any G10 currency, as the 36% probability express priced in the betting markets (source: Oddschecker) of a no-deal Brexit on 29 March seems fair given the current dynamics in the UK parliament. So, we look forward to the 28 February and the next Meaningful Vote in the Commons, where, should that be voted down then the process could take a radical turn.
We can almost turn off between now and the 28th, but then if you are trading GBP, it becomes the centre of your world.
A focus on the options markets and one-month GBP/USD risk reversals sit a -1.15x, showing the skew to buy put cable volatility (vol) over call vol is there, although the market historically has bearish exposures on the GBP. However, the skew has come back sharply and is not at extremes by any means.
It feels like traders want to buy the GBP, but timing, as with anything in trading, is paramount.
There has been no clear reaction in Asia today to headlines that “*US-CHINA TRADE TEAMS SAID TO BE FAR APART ON REFORM DEMANDS”. But, if ever we need to see a positive resolution to the talks then the fact that German GDP was zero then the time is now. The US is not out of the woods either, with US retail sales falling the most since 2009 on a 'glitch', but should still have strong adverse effect on Q4 GDP.. Keep in mind that the US retail sales will spill into the Q1 GDP print, which is running closer to 1% YoY growth at this stage.
What happens if we truly don’t see an extension?
Granted, the talk yesterday was that we would see a 60-day extension to the trade truce. However, should it be that we head into 1 March with market pricing out an extension and a genuine belief that the $200b in goods see a lift in tax to 25% tariffs, then watch out volatility, and we should be shorting global equities and be big buyers of US Treasuries and JPY. Naturally, Trump knows this, and he craves a higher stock market, which he sees as a voting mechanism on his tenure as President.
It just seems unthinkable that we won’t see an extension, even if the prospect of this ‘real deal’ Trump talks about seems a tail order. However, if one man that holds the element of surprise then it The Donald, but there has been so much attention from key figureheads of the huge ramifications that it simply isn’t project fear and should the market not like what they hear then we will see sizeable risk aversion.
Eyes on USD/CNH
USD/CNH remains the most important cross in global FX markets. It is driving both EUR/USD (and AUD/USD), and as USD/CNH finds buyers, so, we see sellers in EUR/USD.
This move makes some sense given the correlations observed between Chinese and European data, and this is more a direct play, whereas Australian dollar and CNH are correlated for different reasons – that being, Australian dollar is the G10 proxy of EM.
Still, as we head into the twilight zone in the talks, we need to take a view of how USDCNH trades should we see no deal and tariffs put up to 25% on the $200b in goods. As well as what plays out, should we see the scenario of a two to three-month extension. Indeed, in the first case, one would argue USDCNH will rally fairly hard and be the catalyst for AUDUSD to push through 70c, while EURUSD will head to 1.10.
Equity markets have seen limited ranges through Asia today and even a nice bid in the oil markets can’t hide the indecision seen in pricing. If I look at S&P 500 futures, I see red flags, with divergence seen between price and stochastic momentum. Still, at this a juncture I see no glaring sell signal on the 4-hour or daily chart, but a few warnings signs that a reversal could be in the mix.
Here in Australia, the ASX 200 has been consolidating between 6100 to 6030 for seven days or so and again, the market suggests patience for now until trade the break.
