No-deal Brexit?

Last week

The beginning of last week brought good news from Japan. The results of Gross Domestic Product were published, which improved by two-tenths percent in the quarterly comparison to 0.7%. Greater optimism, however, brought an annual comparison when the 3% result was printed, a significant leap compared to the 2.6% expected. The Japanese economy is now growing at the fastest pace since the beginning of 2016.

Brexit. Mayor of London, Sadiq Khan, calls on the Prime Minister May to invoke the second referendum on Brexit. He did so after the Cabinet meeting met to discuss issues in the event of a failure to reach a deal on Britain's departure from the European Union. According to Khan, negotiations are chaotic, confusing and leading to a dead end. Theresa May has repeatedly reiterated that in no case will the second referendum be declared, as the only referendum that took place is valid and binding. The main negotiator for the EU, Michel Barnier, however, said that the deal with Britain is realistic and can take place in 6 to 8 weeks. These words sent Sterling and Euro up.

European Commission President Jean-Claude Juncker presented his last speech about the state of the Union at the Euro-Parliament. He mentioned the need to strengthen the euro and its deeper payment implementation among EU countries, increasing defense spending, EU Immigration Policy, Europe's trade openness, and proposed a fundamental change in the way member states vote on important tax issues or their foreign policy.

The European Central Bank (ECB) and the Bank of England (BoE) did not raise their interest rates as expected. During the press conference, Mario Draghi reassured the ECB's status by reiterating that the nearest eurozone interest rate increase will not take place until the second half of 2019. Draghi also confirmed the commitment to end of bond purchases this year. The Bank of England then warned against the rise in uncertainty in the financial markets before the UK leaves the EU. BoE Governor Mark Carney has agreed to prolong his stay as the head of the central bank by the end of January 2020, due to Brexit uncertainties.

Ten years ago, the global financial crisis broke out after the US investment bank Lehman Brothers fell. In the United States, the mortgage market and the inability of households to repay the loans caused the global avalanche. Another periodic financial crisis has started on a global scale. The result was strict regulation of financial markets, interest rates drops and austerity measures.

 

This week

The United States renews talks and negotiations with China on import tariffs. These negotiations had a clear end last week until the US Treasury Secretary Steven Munchin had recently joined the issue. However, it is not entirely clear whether he has the support of President Trump. Trump has, once again, announced that his administration will increase the import tariffs on Chinese products by this week. Due to the current confusion and trade tensions, it is possible that the safe haven currencies will benefit from any crucial decisions.

Banks are closed in Japan on Monday, so trading the Asian session will be calm. On Wednesday, the Bank of Japan will announce interest rates, including a report and a subsequent press conference. However, no changes are expected this time either. Japan has a negative interest rate and macro-indicators do not give many reasons for any rise. Core inflation is well below the 2% target of BoJ and the bank has recently opened the way for a wider bonds purchases. If Governor Kuroda highlights the latest good GDP data at his conference, it may have a strengthening impact on Japanese Yen.

On Wednesday, UK inflation, as measured by the CPI indicator, will be announced on a year-on-year basis. The Bank of England (BoE) raised the interest rates at the previous decision in August after inflation increased slightly. However, the inflation is now expected to grow by a tenth of a percent, a small increase of 2.4% compared to the previous 2.5%.

Early in the morning CE(S)T, quarterly GDP will be published in New Zealand. This is now expected to be significantly better than in the previous quarter, by three-tenths of a percentage point. This deviation, if overcome, could be of great importance for the further direction of the New Zealand dollar, which was weak lately. This was due to unfavorable macroeconomic data, lowering dairy prices and trade-related tensions.

The Swiss interest rate will be announced on Thursday. Together with the decision, a statement by the Swiss National Bank (SNB) will be published regarding the decision and the state of the economy. The monetary policy of the SNB has remained unchanged since the unexpected termination of its intervention commitment to EUR/CHF in 2015. The interest rate of the SNB (Libor rate) is now in the negative territory at -0.75% and this time either there is no change in the cards. The SNB, however, has already announced that it is ready to intervene in favour of its currency rate, if necessary. In view of the current global situation, market developments and other central banks raising their rates, SNB may mention the possibility of abandoning its negative rate.

Canadian inflation, as measured by CPI indicator and Core CPI, will be released on Friday. For Canada, the Core CPI, which excludes cars, is more important. Inflation indicators are essential benchmarks for the Bank of Canada to determine further interest rate hikes. If Inflation beats, the Bank of Canada can continue in its cycle of interest rates increases as soon as in October. An important factor, however, is the NAFTA agreement, which is not yet concluded between Canada and the United States.

Scheduled Geopolitical events

  • US Defense Secretary James Mattis visits Macedonia to show US support for Macedonia's entry into NATO.
  • Russian President Vladimir Putin and Turkish President Recep Tayyip Erdogan meet in Sochi, Russia on Monday.
  • On Tuesday, the General Assembly of the United Nations will begin in New York.
  • Polish President Andrzej Duda meets with US President Trump on Tuesday in a White House.
  • On Thursday, an informal meeting of EU leaders takes place in Salzburg, Austria. Topics will be Brexit, illegal migration and others.
  • Japan's Economy Minister Toshimitsu Motegi will meet with his US counterpart Robert Lighthizer in New York on Friday to launch the second round of talks between the US and Japan on trade relations.

For FTMO,

Pavel Dusek