Morning Brief – Friday 19th

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Trouble throughout the Eurozone, the United States and the UK makes for interesting trading within the world’s most popularly traded currency pairs. Marked by a spike in the VIX, a volatility index traded on the Chicago Board of Options Exchange, which currently carries a 19 handle, price movements across the board have become more exaggerated, sudden and severe.

Continued trouble in Italy has pushed yields on a generic 10 year government bond above 3.50 (3.78 at the time of writing); a price that we have not seen associated with Italian debt for the past four years since the climax of the European Sovereign Debt Crisis. Following the European Council’s summit, Italy’s budget proposal remains in the foreground of investors’ minds. Following verbal admonitions from the EU budget Commissioner and even the European Central Bank president himself, the populist coalition government made up of domestic ‘league’ and ‘five star movement’ parties looks to be in trouble.

With a lack of momentum behind Brexit both abroad and at home following the Brussels summit, investors are left to only price in yet another delay in a final deal and a short and unconfirmed extension of the transition period. Given the rapidly approaching March 29th 2019 deadline, it is apparent that traders have looked upon the Pound with relatively sanguine eyes in the face of yet another set back. In cable, 1.3250 attracted considerable resistance and selling pressure has been unable to shift GBPEUR, still carving a narrow channel, banked by 1.10 and 1.16.

In the United States, the Federal Reserve Bank is under attack but surviving well. Taking scathing criticism from the White House and even its own constituent bankers, the question continues to echo, ‘how long can we tighten rates for?’. The Reserve, in its latest September minutes, removed all reference to incumbent rate policy as ‘accommodative’. There was little fallout from the exclusion within markets given the elevated rates that the US economy presently awards investors and the tenuous link to future policy given the retrospective nature of the change. The Dollar remained bid following the release of minutes with market participants unable to warrant shedding US Dollar based assets given the unparalleled reward the greenback holds.

Discussion and Analysis by Charles Porter

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