The pound spiked higher across the board during the morning London session, thanks to a leaked draft of the future relationship between the U.K. and the E.U., which included plans for a free-trade deal.
The Swissy, meanwhile, was the main laggard, which is a bit strange since risk aversion was the dominant sentiment in Europe.
- BOF French business survey: 105.0 vs. steady at 104.0 expected
Draft of post-Brexit relationship leaked
If you have been following Brexit-related events closely, or if you were able to read up on Forex Gump’s 5 Major Brexit-Related Updates You Need To Know About, then you know that there’s no post-Brexit trade deal yet, but that there is already an outline on the the planned framework for the future relationship between the E.U. and U.K., which includes plans for a free-trade deal.
However, an actual deal won’t be hammered out until after an actual Brexit. Also, negotiations are only expected to start during the transition period.
Well, it turns out that the E.U. and the U.K. are already paving the way for a potential deal since the 7-page outline released last week has now evolved into a 26-page draft declaration that was leaked during the session.
And according to the leaked draft, the E.U. and the U.K. are still aiming for a free-trade deal:
“[T]he Parties envisage comprehensive arrangements that will create a free trade area, combining deep regulatory and customs cooperation, underpinned by provisions ensuring a level playing field for open and fair competition.”
There are also these bits about some prep work ahead of negotiations and before an actual Brexit so that a trade deal can be hammered out quickly.
“Between the approval of this declaration and the United Kingdom’s withdrawal from the Union, the Parties will each engage in preparatory organisational work, with the aim of enabling rapid commencement of and progress in formal negotiations.”
However, the draft also stated that negotiations will only start “Immediately following the United Kingdom’s withdrawal.”
Other than those, there were also these rather interesting bits below about replacing the “backstop solution”. And remember, dissatisfaction with Theresa May’s withdrawal deal (and the resulting attempt to oust May from power) was partly due to the backstop, so this declaration likely helped to ease some of the pressure on May.
The Parties recall their determination to replace the backstop solution on Northern Ireland by a subsequent agreement that establishes alternative arrangements for ensuring the absence of a hard border on the island of Ireland on a permanent footing
Anyhow, the leaked draft appears to be the real deal since European Council President Donald Tusk tweeted the following after the draft was leaked.
I have just sent to EU27 a draft Political Declaration on the Future Relationship between EU and UK. The Commission President has informed me that it has been agreed at negotiators’ level and agreed in principle at political level, subject to the endorsement of the Leaders.
— Donald Tusk (@eucopresident) November 22, 2018
Brexit hogged the spotlight during the morning London session, but there were also a few Italy-related updates that are worth highlighting.
And first up is yet another defiant comment from Italian Deputy PM and League leader Matteo Salvini since he said that “We don’t take steps backwards” despite the E.U.’s threats to impose sanctions.
Italian PM Giuseppe Conte also defended Italy’s budget, albeit in a more diplomatic manner, since Conte said that:
“We are not willing to give up anything that is for the Italian people.”
“We are responsible. There is no rebellion against the EU.”
“We and Europe have a common objective – we are working to reduce the (public) debt.”
Deputy PM and 5-Star leader Luigi Di Maio also chirped in and he said that:
“The infringement procedure must be discussed and I believe in discussion. I hope for dialogue and debate because we want to explain our case”.
“We have a different way to approach the debt issue and I realise that some people feel disorientated, but you cannot treat Italy like this after years of being massacred”.
On the E.U.’s side, E.U. Commissioner Pierre Moscovici tried to sound conciliatory, saying that:
“I’m convinced that eventually we are going to get there because it’s in the common interest.”
“Dialogue in the current situation is more important than ever. It’s impossible to take any measures without talking, without trying to go all the way to correct things, without trying to bring different perspectives together.”
ECB’s meeting minutes
The minutes of the ECB’s most recent monetary policy meeting were released late into the session.
And after a quick read, there doesn’t seem to be anything new from what ECB Overlord Draghi already discussed during the October 25 ECB presser.
The only thing probably worth highlighting is that while the minutes reiterated that “risks to the euro area growth outlook were generally still assessed to be broadly balanced,” ECB members apparently think that external risks are “tilted to the downside,” which is a bit dovish.
“[M]embers considered that the uncertainties related to global factors remained prominent, and the risks related to the external environment were assessed to be tilted to the downside.”
However, the minutes also tried to sound optimistic, noting that:
“Although risks relating to protectionism, vulnerabilities in emerging markets and financial market volatility remained prominent, it was considered that the underlying strength of the economy continued to mitigate downside risks to activity.”
Risk aversion returns to plague Europe
The risk-friendly vibes from yesterday were apparently short-live since risk aversion made a comeback during today’s morning London session, sending the major European equity indices broadly lower.
And market analysts were blaming the return of risk aversion on disappointing earnings results and falling Italian bank shares due to concerns surrounding Italy’s budget.
- The pan-European FTSEurofirst 300 was down by 0.66% to 1,390.50
- Germany’s DAX was down by 0.63% to 11,173.74
- The blue-chip Euro Stoxx 50 was down by 0.57% to 3,135.95
Major Market Mover(s):
The pound steamrolled over its peers and was easily the top-performing currency of the morning London session (and of the day so far), thanks to the intense buying pressure after the draft document was leaked.
The pound then slumped lower across the board, but was quickly bought up again, and the apparent catalyst for that were reports that Gibraltar and fishing rights have not been resolved yet.
However, it’s also possible that the pound’s slump was one of those “fat finger” moments since the slump only lasted for around a minute, and the pound very quickly recovered after the slump.
GBP/USD was up by 97 pips (+0.76%) to 1.2882, GBP/JPY was up by 102 pips (+0.71%) to 145.52, GBP/CHF was up by 104 pips (+0.82%) to 1.2814
The Swissy was nudged broadly lower and was the worst-performing currency of the session, which is a bit odd since risk aversion was the dominant sentiment in Europe. Perhaps the SNB was sneakily weakening the Swissy again?
It’s possible that we’re seeing some unwinding of safe-haven bets because of easing Brexit-related uncertainty since the Swissy began losing out to the Greenback and the yen when that draft was leaked.
However, most CHF pairs were already encountering sellers before the draft was leaked, which is a bit strange.
USD/CHF was up by 6 pips (+0.06%) to 0.9947, EUR/CHF was up by 12 pips (+0.11%) to 1.1345, CAD/CHF was up by 16 pips (+0.22%) to 0.7526
Watch Out For:
- 1:30 pm GMT: Canadian corporate profits (1.0% previous)
- 2:45 pm GMT: BOC Senior Deputy Governor Carolyn Wilkins will speak in a panel discussion
- 3:00 pm GMT: British PM Theresa May will speak before Parliament
- 3:00 pm GMT: Euro Zone consumer confidence index (no change from -3 expected)
- 3:30 pm GMT: The BOC financial system review will be published
- 8:55 pm GMT: BOE MPC Member Michael Saunders is scheduled to speak