Sterling has had another 24 hours of Brexit driven volatility, rising yesterday morning before ultimately weakening to close lower against the euro, but still slightly higher against the dollar. The ongoing drama with the UK Government’s ostensible withdrawal from trade talks occupied news flow in the afternoon, with Cabinet Office Minister Michael Gove making a statement to Parliament that initially seemed to support Prime Minister Boris Johnson’s claims from Friday that negotiations had been broken off. However, as Gove was speaking, Chief EU negotiator Michel Barnier tweeted that the EU remained willing to intensify talks, and discuss a legal text. Later, Downing Street attempted to reinforce the idea that talks were “over” unless the EU was willing to offer a fundamental change of approach. However, further discussions between Barnier and his UK counterpart David Frost are expected to happen over the phone in the next 48 hours, according to news reports. On the whole, sterling’s rather muted reaction to these theatrics suggests that market participants believe the latest developments have not seriously undermined negotiations, despite the UK Government’s attempted signalling. The data calendar is sparse today, meaning markets can focus fully on the latest thrilling, high-stakes developments in trade talks.


The euro enjoyed a boost against the US dollar yesterday, rallying by a 2-week record of 0.76% vs USD. This morning, the euro remained the best performer against the dollar. In the absence of major eurozone headlines, the strength may be attributed to a rebound from investors shrugging off concerns about the renewed lockdown measures in Europe and the safe haven dollar trading softer in general. With Germany, France, Italy, Spain, Belgium and the Netherlands all having announced new measures in the past two weeks however, the downside risk to the eurozone recovery remains large. The European Central Bank only upgraded its inflation outlook a month ago, but the case count surge across Europe and the new wave of government restrictions may be a reason for the central bank to revise or add to its emergency bond-buying programme in December. This becomes particularly relevant as September marked the second month of deflation, putting increased pressure on the bank to intervene. On the fiscal side, the expanded EU budget talks, which remain stalled, sparked concerns about a delay to the rollout of the EU recovery package. On the data front, this morning’s Purchasing Price Indices from Germany printed better than expected at 0.4% month-on-month compared to the negative 0.1% expected and August’s 0.0%. For the remainder of the day, the eurozone data front remains sparse.


The US dollar spent this morning in the green against the whole G10 currency board, without a clear risk-on or risk-off market mood dominating FX price action. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin seem to be a step closer to narrowing their differences over a stimulus package, but the Democrats and the White House remain at odds over both the scope and scale of aid. The progress came in advance of Pelosi’s Tuesday deadline for reaching a pre-election deal with President Donald Trump. Stimulus talks will continue this afternoon, but rising concerns about the risk of a disputed US election outcome have muted optimism that a deal will be reached today. In terms of data, markets will focus on US housing starts and building permits that are released at 13:30 BST. Both indices are set to have slightly increased from last month, according to the median of forecasts submitted to Bloomberg.


The loonie’s rally yesterday was marginal to say the least as the US dollar fought back in the late part of the session. The unwillingness of USDCAD to break substantially lower and hold the move befits what was seen in speculative markets over the last week. Non-Commercial futures contracts in CAD saw the biggest build in long positions out of the G10 last week, but the net position still remains short on the whole. While this isn’t indicative of the current market, it does give some signal as to the sentiment surrounding the currency. That is, market participants have become marginally less bullish on CAD, which can also be seen by the current price the loonie is trading at. Meanwhile, the Covid situation in Canada hasn’t started to dramatically improve. Quebec announced over 1,000 new cases yesterday and over 2,000 new cases over the weekend, while after posting a drop in cases on Sunday to 658, Ontario recorded 704 new infections on Monday. The 28-day lockdown measure is yet to bear results, but the proof will be evident about two-weeks into the practice when infection rates should drop. On the economic front, the Bank of Canada’s business outlook survey was released yesterday and highlighted tentative optimism from the business sector. The report, however, fell to the market’s wayside as the data was undermined by the imposition of tighter lockdown measures in Ontario and Quebec after the survey period ended. This means the -2.2 reading for the current business outlook is likely to substantially overreport the true sentiment by business on the ground at present. With little on the data front today, loonie traders will keep one eye on US fiscal stimulus as Nancy Pelosi’s deadline draws in, which is likely to drive the broad USD move in lieu of any data.



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