UK/EU reach new Brexit deal but UK opposition parities not on-board
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Dollar/CAD is trading on the defensive this morning as another Brexit-inspired wave of optimism sweeps over markets. Yesterday's slump off chart resistance in the 1.3220s felt driven by dovish comments from Chicago Fed President Charles Evans in our opinion. More here from the Financial Post. This morning’s economic data dump out of the US and Canada is not ruffling many feathers, but we’d argue the numbers are bearish on net for USDCAD at the moment. The next support level below is 1.3140-50. We think the market could attempt a move higher to the 1.3200 level should trend-line support in the 1.3160s be regained.
US Housing Starts (Sep): 1.256M vs 1.320M exp (miss)
US Building Permits (Sep): 1.387M vs 1.350M exp (beat)
US Philly Fed survey (Oct): 5.6 vs 8.0 exp and 12.0 prior (miss)
US Industrial Production (Sep): -0.4% MoM vs -0.1% exp (miss)
Canadian Manufacturing Sales (Aug): +0.8% MoM vs +0.6% exp (beat)
Canadian ADP Employment (Sep): +28.2k vs +56.5k exp, prior +49.3k revised to +109.9k (mixed)
Last night’s API report showed a surprisingly bearish build to oil inventories over the last week (+10.5mln barrels vs +2.9mln exp), which in turn knocked November crude oil prices back below trend-line resistance in the low 53s. The EIA will report its weekly inventory change number at 11amET this morning, with the Reuters Poll estimate now sitting at +2.878M barrels (which seems a bit low to us).
NOV CRUDE OIL DAILY
Euro/dollar rode the Brexit-deal wave higher this morning as well, and this came on the back of a strong rally yesterday that was edged on by weak US Retail Sales data and cautious comments from the Fed’s Evans. The market busted through chart resistance in the 1.1080-90s and shot higher to the next trend-line resistance level in the 1.1140s. However, the Brexit story is quickly changing and we’re now seeing 1-week GBP option volatility scream higher above 20% as GBPUSD reverses lower (more on this below). EURUSD sales are creeping back in as a result but the surge in EURGBP off its 0.8600 lows is helping to stem the slide.
DEC GOLD DAILY
Sterling surged above the 1.2900 level in London trade this morning after the UK and the EU announced a “great new Brexit deal”, but the optimism was short lived as the UK opposition parties, most notably the DUP, came out with staunch objections to it. More here from the BBC. This is now introducing massive event risk for the weekend, as traders bet Saturday’s UK Brexit vote in the House of Commons will fail. Reports that Boris Johnson will NOT seek Brexit extension from the EU is also adding to trader anxiety here in our opinion. A senior UK government official said earlier that “the PM will tell EU leaders that it’s this deal or no deal – but no delays.” Implied volatility (the largest factor in options pricing) for 1-week EURGBP and GBPUSD expiries have shot to their highest level since the 2016 Brexit referendum. The 1-month 25delta risk reversal, which exploded higher into a premium for calls vs puts last week, has now collapsed back into a discount (market now wants to price equidistant puts higher vs calls). GBPUSD has moved swiftly back below this morning’s breakout point in the 1.2880s and EURGBP has reversed sharply higher off the 0.8600 support level. The headlines are moving fast and so we’d advise even further caution with when it comes to your execution strategy.
The Australian dollar shorts are scrambling to get out over the 24hrs after yesterday’s weak chart technicals gave them a false sense of confidence (ourselves included). The AUD buying started when the Fed’s Evans took the mic and the USD started to sell off broadly. This took the market back above the 0.6750 level it broke down below earlier in the day. The buying continued in Asian trade overnight following a beat on the Australian unemployment rate in the country’s September employment report (5.2% vs 5.3%). This took the market higher to chart resistance in the 0.6780s. Finally, markets collectively cheered this morning’s announcement of a new Brexit deal, sending AUDUSD roaring back above the 0.6800 level. Some of this is getting tempered back obviously as GBPUSD traders now reverse the market lower to reflect rising event risk for the weekend, but AUDUSD continues to hold the 68 handle. Today’s NY close could create a significant bullish development on the daily chart should the market close around here or a little bit higher.
Dollar/yen is struggling notably today as US 10yr yields fail to hold their Brexit-deal highs above 1.77%. The market has reversed back below the 108.80s after trying to break above it earlier in European trade. We think this all makes sense, given the possibility that the new Brexit deal might not pass the UK House of Commons on Saturday. The Fed added another 104.2bln USD of liquidity to money markets via overnight and term repos this morning, and this comes on the back of their 7.5bln T-bill purchase operation yesterday that was 4.3x oversubscribed!!!
US 10YR BOND YIELD DAILY
Charts: Reuters Eikon
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