Uncertainties return to cap GBP, RMB and US yields

Brexit and trade deal uncertainties weigh on the GBP and RMB. 10Y US yields not ready to push above 2% yet.
Philip Wee, Eugene Leow07 Nov 2019
    Photo credit: AFP Photo

    FX: Uncertainties over UK elections and China-US trade deal

    The British pound will remain sensitive to opinion polls tracking the UK election set for December 12. Sterling has retreated this week from last Friday’s high of 1.2946. Fears of a hung parliament lowered GBPUSD to 1.2855 on Wednesday. According to a YouGov poll, support for the political parties were split between the Conservative Party (36%), Labour Party (25%), Liberal Democrats (17%) and the Brexit Party (11%). Taking advantage of voter volatility, the opposition parties are presumably thinking only about denying Prime Minister Boris Johnson the absolute majority he seeks in the House of Commons. If the elections do not resolve the political paralysis that prevented Brexit from happening, Brussels may not extend Article 50 a third time. Hence, the odds of a no-deal Brexit on January 31, 2020, cannot be totally discounted. 

    The Chinese yuan’s appreciation has stalled at 7.00 to the USD. Hopes for China President Xi and US President Trump to sign a Phase 1 trade deal this month have sizzled. First, both countries have yet to agree on an alternative venue after violent protests forced Chile to cancel the APEC Summit originally scheduled for mid-November. Second, China’s desire to roll back more US tariffs is likely to require more time to negotiate terms. The current trade talks have originally centred on delaying US tariffs scheduled for December; the US has already suspended the tariff increases set for October 1. Until we get more clarity on the venue and US’s position on China’s tariff request, look for Emerging Asian currencies and the Australian dollar to give back some of the gains chalked in October.

    Rates:  10Y US yields not ready to break above 2% yet                  
    While we think that yields may be biased higher in 2020, breaking above 2% in the near term is likely to prove difficult. Firstly, the market has removed the tail risk of hard Brexit while also reducing the odds of another flare up in China-US trade tensions. However, these risks are now concentrated in December - the signing of the interim trade deal could be delayed (previously November) while the UK elections is scheduled for December 12. Secondly, while there have been tentative signs of stabilization in global PMIs, the numbers are still depressed. It would probably require a few more months of improved data before DM yields (especially USTs) move another leg higher.

    A China-US trade deal that beats expectations could cause DM yields to gap higher and conceivably push 10Y US yields above 2%. However, we think that the probability of this occurring is low. And in any case, the still-weak global growth backdrop suggests that a yield spike might prove difficult to sustain. 10Y US yields have already faded the extreme pessimism (pricing out aggressive Fed cuts) and will probably stay in the 1.5-2.0% range through to the end of the year.

    Philip Wee

    FX Strategist - G3 & Asia

    Eugene Leow

    Rates Strategist - G3 & Asia

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