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The pound rallied for a second day amid optimism a speedy resolution to the Brexit deadlock is in store after the Conservative Party’s election victory.
Sterling advanced against all its major peers after Chief Secretary to the Treasury Rishi Sunak said the government plans to put its Brexit legislation before Parliament ahead of Christmas to ensure the country will leave the European Union as planned at the end of January.
“With the Tories’ decisive victory, U.K. markets should quickly shift focus to the coming trade negotiations and spending priorities,” Audrey Childe-Freeman and Tim Craighead, strategists at Bloomberg Intelligence, wrote in a research note. “Sterling has room to keep running.”
The pound climbed 0.6% to $1.3415 as of 7:11 a.m. in London after surging as much as 2.7% on Friday to $1.3514, the strongest since May 2018. Sterling advanced 0.5% to 83.05 pence per euro.
The U.K. currency is being pushed higher by hedge funds, according to an Asia-based currency trader, who asked not be named because the person is not authorized to speak publicly. Most clients are confident U.K. Prime Minister Boris Johnson will successfully execute Brexit with the EU and reach a free-trade agreement with the U.S., the trader said.
A Citigroup Inc. index indicated currency funds have almost completely unwound their bearish bets on sterling.
Asian markets were mixed on Monday morning in Asia as U.S. Trade Representative Robert Lighthizersaid the phase one Sino-U.S. trade deal is “totally done,” but no date is set for the next phase two talks.
China’s Shanghai Composite slipped 0.1% by 11:35 PM ET, while the Shenzhen Component gained 0.6%. Hong Kong’s Hang Seng Index dropped 0.3%.
The phase one deal was agreed on Friday and the two nations are expected to official sign the partial accord in the first week of January,
On the data front, China’s industrial output rose 6.2% in November from a year earlier, versus a median estimate of 5.0%. Retail sales expanded 8.0% during the month, compared to a projected 7.6% increase. Fixed-asset investment was unchanged at 5.2% in the first eleven months, the same as forecast.
Japan’s Nikkei 225 traded 0.1% lower. The Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index (PMI) edged down to a seasonally adjusted 48.8 in December from a final 48.9 in the previous month.
The index stayed below the 50.0 threshold that separates contraction from expansion for an eighth month.
South Korea’s KOSPI was little changed.
Down under, Australia’s ASX 200 surged 1.7% even after the country lowered its forecasts for wage increases, economic growth and budget surplus.
Britain’s economy will cast off some of the Brexit uncertainty that has held it back since 2016 after Prime Minister Boris Johnson’s election triumph, but the risk remains of another “cliff-edge” showdown with Brussels in a year’s time.
With Britain’s exit from the European Union on Jan. 31 now a foregone conclusion, the question for investors is whether Johnson will stick to his campaign promise not to delay the end-of-2020 deadline for a new EU trade deal.
That deadline is widely seen as tough to meet, given the scale of issues to be resolved.
In the short term, the biggest election victory for Johnson’s Conservative Party since Margaret Thatcher’s 1987 triumph removes a major brake on growth: the deadlock in parliament over how, or even whether, to proceed with Brexit.
Johnson said in a victory speech on Friday that Britain would leave the EU on Jan. 31 “no ifs, no buts, no maybes.”
His election win also banishes the prospect of a sharp shift to the left under the Labour Party which promised nationalizations, more power for trade unions and a much bigger role for the state, which had worried many business leaders.
“But more importantly, it could give the prime minister the political breathing room to ask for an extension to the transition period.”
Investors pared back their bets on the Bank of England cutting interest rates as the uncertainty about the way ahead for Britain’s economy lifted, at least in the short term.
The world’s fifth-biggest economy has slowed since voters decided to take Britain out of the EU nearly 3-1/2 years ago.
Leaving the bloc, which accounts for nearly half the country’s exports, is seen as a drag on its economic growth over the long term.
But the new sense of clarity about Brexit, at least in the short term, is likely to lead to a pick-up in the pace of growth in the coming quarters, economists said.
British government bond prices fell sharply as trading in London’s gilt markets opened, helped not only by the conclusive election result but also by signs of an end to the U.S-China trade deal that has weighed on the global economy.
But economists turned their attention quickly to what the election result meant for Johnson’s longer-term Brexit plans.
He promised during the election campaign not to extend a Brexit transition period beyond Dec. 31 2020.
That raises the prospect of tariffs and other barriers coming into force for Britain’s trade in goods and services with the EU in just over a year’s time.
Economists at RBC Capital Markets said the new government would probably try to keep a no-deal Brexit on the table for as long as possible to maintain leverage with the EU in the trade talks.
“However, with such a comfortable winning margin Johnson is not reliant on any faction of his party, in particular the hard-Brexiteers who might have tried to steer him toward a hard Brexit at the end of the transition period,” they said.
“Some form of extension now looks more likely even if some effort will be made to give the impression that is not the transition period that the Conservative Party promised not to extend in its manifesto.”
But economists at Citi said they thought Johnson would not try to delay the transition phase because he won support from voters who backed the Conservatives for the first time because of the party’s tough stance on Brexit.
“In this scenario, when the UK exits the EU Single Market and Customs Union on 31 December 2020, we expect a mild recession to follow in 2021 as divestment among exporting sectors accelerates,” they said.
The pound rose to a three-and-a-half year high versus the euro and the highest in more than a year versus the dollar after exit polls suggested a win for the Conservatives, which should help ensure the UK’s smooth exit from the European Union.
The Chinese yuan rose in offshore trade and the Japanese yen fell after a source told Reuters that the United States and China have agreed some tariff reductions and a delay on tariffs set to go effect on Dec. 15.
The early results suggest the election will relieve almost four years of uncertainty about when Brexit would take place, which should be supportive of the pound.
A successful scaling back of trade tension would relieve one major headwind to economic growth, which suggests lower demand for the safe-haven yen. Avoiding new tariffs should also be a boost to China’s slowing economy, which should draw more investors to the yuan.
Against the euro, sterling rose around 2% to as high as 82.80 pence, the highest since July 2016, which is shortly after the Brexit referendum that hammered the currency.
The pound surged by 2.2% to $1.3474, reaching the highest since May 2018.
The pound plunged more than 10% in the immediate aftermath of Britain’s vote to leave the European Union in June 2016, while $2 trillion was wiped off world markets.
The exit poll, which suggested UK Prime Minister Boris Johnson would get a majority of 86 – the largest of any Conservative leader since Margaret Thatcher won in the 1980s – should empower him to deliver Brexit on Jan. 31.
Official results will be declared over the next seven hours.
In the offshore market, the Chinese yuan rose 0.33% to 6.9273 per dollar, after surging on Thursday to the highest since Aug. 1 due to relief about a resolution to trade friction.
The yuan rallied and the yen fell late on Thursday after Bloomberg News reported that U.S. President Donald Trump signed off on a trade deal with China that will delay a new round of tariffs scheduled for Dec. 15.
The dollar index against a basket of six major currencies fell 0.35% to 96.736, approaching the lowest since July this year.
European stocks found their feet again on Wednesday after the Federal Reserve signalled that it’s likely to remain on hold throughout next year, seemingly convinced that historically low jobless rates won’t create enough inflationary pressure to warrant a rate hike.
By 5 AM ET (1000 GMT), the benchmark Stoxx 600 was up 0.3% at 407.50, while the FTSE MIB was up 0.7% and the FTSE 100 was up 0.6%. Airlines and semiconductor stocks were among the biggest winners.
The biggest gainer on the continent was, however, Russia’s RTS, where the heavily-weighted commodities companies all profited from the dollar’s post-Fed decline. A weaker dollar generally supports prices for commodities from oil to base metals and gold.
The FTSE’s gain was all the more notable, given that it came against the backdrop of sterling strength – GBP/USD was steady at above $1.32 in morning trade in London.
Traders appeared to be anticipating a Conservative majority at the general election, where final opinion polls suggested the Tories led by some 10 points nationwide. Given the U.K.’s electoral system, that may translate into anything from a large majority to a ‘hung’ parliament with no overall majority, but bookmakers see a 60% chance of a Tory majority, with spread bettors making markets implying they’ll win 341 of the 650 seats up for grabs.
The U.S. dollar slipped on Thursday in Asia after the Federal Reserve kept interest rates on hold, suggesting that the current path of monetary policy was “appropriate” to support economic growth and would likely remain in place through next year.
The U.S. dollar index that tracks the greenback against a basket of other currencies slipped 0.1% to 97.035 by 10:02 PM ET.
Overnight, the Federal Open Market Committee (FOMC) left its benchmark rate unchanged in the range of 1.5% to 1.75%.
“Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective,” the FOMC said in its statement.
In July, the Fed cut interest rates for the first time since the Financial Crisis, more than a decade ago. Two further rate cuts followed the July cut.
“In order to move rates up, I would want to see inflation that’s persistent and that’s significant,”Fed Jerome Powell at a news conference in Washington.
“A significant move up in inflation that’s also persistent before raising rates to address inflation concerns: That’s my view,” he said.
Powell cautioned, however, that the Fed’s reluctance to hike rates again isn’t a strict, codified rule.
“We haven’t tried to turn it into some sort of official forward guidance,” he said. “It happens to be my view that that’s what it would take to want to move interest rates up in order to deal with inflation.”
On the Sino-U.S. trade front, investors remained on edge as Sunday’s deadline for the next round of U.S. tariffs on Chinese goods looms.
Reuters cited three people familiar with the matter and reported that U.S. President Donald Trump will meet with top advisers on Thursday about the deadline. The article added that it is expected that the tariffs will be enforced.
The GBP/USD pair rose 0.2% to 1.3222 ahead of a European Central Bank meeting and the U.K. election later in the day.
The AUD/USD pair and the NZD/USD pair climbed 0.2% and 0.1% respectively.
The USD/CNY pair edged down 0.1% to 7.0317.
The USD/JPY pair also inched down 0.1% to 108.57.
The next week could set the tone for the $6.6 trillion-a-day currency market in 2020.
The geopolitical risks that have shaped foreign exchange this year — Brexit and the U.S.-China trade war — are approaching a critical point, according to Credit Agricole (PA:CAGR) SA. The U.K. will vote for a government on Thursday to negotiate the next phase of Brexit, while Washington will impose further tariffs on Beijing on Dec. 15 unless a phase-one deal is reached before then.
It’s also looking busy on the central bank front, with the Federal Reserve, Swiss National Bank and the European Central Bank all set to deliver their latest monetary policy decisions. With the ECB expected to signal a more balanced policy outlook, strategists are betting on the euro to rally in 2020. On the other hand, the Fed may acknowledge the persistence of geopolitical risks, weighing on the dollar.
“The ‘good’ outcome would encompass a U.S.-China trade deal that includes a rollback of any planned and, potentially, some existing tariffs,” wrote Credit Agricole strategists including head of Group-of-10 currency strategy Valentin Marinov in a research note. “In addition, we would have a victory and a parliamentary majority for the Conservative party. We see the dollar and pound as well as G-10 risk-correlated and commodity currencies as the biggest winners under this outcome.”
For Investec Asset Management, it’s a good time to bet on riskier assets while buying haven currency the yen. Portfolio manager Russell Silberston is positive on the outlook as the scenario of a Conservative majority and clarity over trade “does not seem that unlikely.”
This year has seen the dollar continue its dominance in global markets by outperforming many of its G-10 peers, flouting calls by major banks for a downtrend in 2019. Meanwhile, the U.K. currency has had a tumultuous ride. The pound fell to an almost three-year low in September before recovering almost 10% after Prime Minister Boris Johnson secured a Brexit deal and called a snap election in the hope of securing a majority and exiting the European Union next month.
The polls into the vote have consistently showed a Conservative majority but investors remain wary of previous polling failures, and the party’s lead has narrowed as the vote draws closer. The market prefers the Conservatives to Jeremy Corbyn’s Labour party, with its pledges to nationalize industries, tax the wealthy and overhaul the economy.
Across the Atlantic, the U.S. President Donald Trump said on Tuesday he was prepared to wait for another year to reach a deal with China.
The uncertainty involved in predicting geopolitics mean “a bad and an ugly outcome are also possible,” according to Credit Agricole. The former would involve a Conservative majority but no U.S.-China trade deal plus fresh tariffs on China, benefiting the pound and funding currencies.
The ugly outcome “would represent the sum of all market fears at present — a hung Parliament in the U.K. and further escalation of the trade war.” In this scenario, the yen, gold and the franc would be the biggest beneficiaries.
For Investec’s Silberston, things could get even more ugly if the U.K. election failed to return a decisive majority and trade tensions flared. He sees the potential for global slowdown fears to return to the market if everything goes badly. Bond markets surged in 2019 on fears of a global recession.
“Tariff imposition and another hung Parliament are the two big worst-case scenarios as these will combine to raise the twin fears that were haunting markets earlier this year,” he said. “More uncertainty spilling over from the manufacturing sector into services, and triggering a recession.”