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Sunday, October 20, 2019

Pound Watchers Refuse to Rule Out No-Deal Twist in Brexit Climax

(Bloomberg) -- Currency strategists are ruling nothing out for Saturday’s crucial parliamentary vote on Britain’s deal to exit the European Union -- and that makes forecasting where sterling will settle something of a crapshoot.

The pound could surge to $1.35 or slip to around $1.26, strategists and fund managers say as they assess the range of possible outcomes from Brexit’s climactic moment.

Sterling already jumped 5% this month to around $1.29 and now it’s pinned to that marker as traders wait to see if Prime Minister Boris Johnson can convince skeptics in the House of Commons to approve the divorce deal he sealed this week. It’s fine margins, and if he can’t, that opens the door to other scenarios including an election, a second referendum, or even a move to leave the EU with no agreement in place.

While Johnson’s accord has lowered the likelihood of a no-deal Brexit on Oct. 31, the risks “are not mathematically zero,” say strategists at Toronto-Dominion Bank, including Ned Rumpeltin.

“Any positions predicated on an imminent no-deal crash-out look difficult to countenance at this stage,” said Rumpeltin, the European head of currency strategy at TD. “Looking forward however, we think it is still a little too early to sound an unqualified all-clear.”

If Parliament does manage to pass the deal this week, the pound could test May’s peak of around $1.3185, the TD strategists forecast, though they see it struggling to move higher in the absence of fresh catalysts.

UBS Global Wealth Management is more bullish. It’s retaining an overweight position in sterling against the dollar, said Chief Investment Officer Mark Haefele. A “convincing deal” could drive the pound to $1.35, he predicted.

Johnson needs 61 of 85 possible votes from potential swing lawmakers, a tight but feasible number. One blow is that Northern Ireland’s Democratic Unionist Party, with 10 potential supporters, came out firmly against the deal.

If lawmakers were to reject it and that led to an extension beyond the Oct. 31 Brexit deadline, the risk of a general election would “suck the wind” out of sterling’s rally and see it test $1.2640-60, the TD strategists predict. And that level could come under significant pressure if Parliament’s blocking of the deal were followed by the EU rejecting a request for an extension to the Brexit deadline.

Other scenarios -- including a potential second referendum that could cancel Brexit altogether, or an election that could cement Johnson’s leadership and seal his deal -- cannot be ruled out either.

No wonder implied volatility on sterling is so high and risk gauges are swinging back and forth. And adding to the drama, the currency market won’t get its first chance to react to the twists and turns of the weekend until trading resumes at 7 p.m. local time (or 7 a.m. in Auckland), when liquidity can be limited and exacerbate price swings.

“No deal remains a threat until either a deal or no Brexit is completed,” Rumpeltin said. “An unexpected jump to an alternative scenario would quickly return both rates and FX to the state of confusion and -- often -- contradiction that has defined much of the Brexit process so far.”

Original Article

Euro Could Have Further to Climb as Global Threats Begin to Fade

(Bloomberg) -- The euro’s rally may have further to run with the shared currency likely to find support from a range of factors after uncertainty over Brexit clears.

The common currency touched its strongest level in seven weeks on Thursday after the U.K. and the European Union reached a deal on Brexit. While British lawmakers could reject the pact on Saturday, the possibility of increased government spending in Europe and further U.S. interest-rate cuts may help keep wind in the euro’s sails.

It will also receive a boost if the European Central Bank looks away from monetary easing and steps up its demands for fiscal stimulus. In recent months, the steady stream of poor economic data out of the region has intensified speculation that the ECB will add to its bond-buying stimulus. Yet its latest wave of quantitative easing faces internal opposition. ECB President Mario Draghi may repeat his call for governments to increase their spending at his final meeting later this month.

This time round, the plea may not fall on deaf ears.

German politicians are coming around to the concept of abandoning the much-heralded “black zero” -- the country’s long-held commitment to a balanced budget -- in case a downturn requires a powerful response. Chancellor Angela Merkel’s government cut its 2020 growth forecast to 1% recently, down from an earlier 1.5%, while China’s economic growth has slowed to levels last seen in the early 1990s.

On top of this, Draghi’s promise of open-ended quantitative easing is also coming into question. The interest rate for overnight loans between European banks, known as Eonia, has actually risen as banks prepare for the start of ECB’s tiered deposit rate system, which is designed to mitigate the cost of lower rates.

Reuters reported last week that the ECB has one year of German debt to buy before reaching its limit, and that policy makers would prefer bending the capital key and buying fewer German bonds instead of changing the issuer limit, also supporting the euro.

Outside the shared currency’s area, add to the mix weak U.S. data, which may force the Federal Reserve to make further cuts, enough in itself to set the euro up for further gains. Production at U.S. factories fell in September by the most in five months, retail sales unexpectedly posted the first decline in seven months, and a gauge of inflation expectations from the New York Fed fell last month to the lowest level since 2013.

Certainly, the euro isn’t out of the woods yet. Dollar liquidity may tighten toward year-end and trade tensions between U.S. and the EU could flare up. As ECB Chief Economist Philip Lane noted, the convergence of inflation toward its aim has recently slowed and partly reversed.

But as sentiment gets increasingly bullish for the euro -- options traders need to pay a premium to own upside exposure across tenors now -- risks are brewing that technical resistance around $1.12 may not be able to absorb buying pressure for long.

  • NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

What to Watch:

  • The U.K. Parliament votes Saturday on U.K. Prime Minister Boris Johnson’s Brexit deal as the Oct. 31 deadline looms
  • Switzerland holds parliamentary elections on Sunday, Canada goes to the polls on Monday
  • The ECB announces its monetary policy decision after the final meeting of President Mario Draghi’s term on Thursday, Oct. 24; Riksbank and Norges Bank meet the same day
  • Policy maker speeches coming up include BOE Governor Mark Carney, Chief Economist Andy Haldane and Dallas Fed President Robert Kaplan
  • Economic releases include U.S. PMIs and durable goods; see data calendar
Original Article

Turkish lira firms nearly 1% against dollar after Turkey-U.S. deal on Syria

By Behiye Selin Taner and Ali Kucukgocmen

ISTANBUL (Reuters) - Turkey's lira firmed nearly 1% against the dollar on Friday, as the prospect of severe sanctions from the United States waned after Ankara agreed to a ceasefire in northern Syria, raising expectations of a rate cut by the central bank next week.

The currency had been under pressure due to a deterioration of ties between Ankara and Washington over Turkey's operation against the Kurdish YPG militia, which was a main U.S. ally in the fight against Islamic State.

In meetings between the allies on Thursday, Ankara agreed to a ceasefire for five days while the YPG withdraws from Syrian border regions. U.S. Vice President Mike Pence said sanctions would be removed after the deal is implemented and no further sanctions would be pursued.

The lira stood at 5.7805 against the dollar at 1238 GMT, firming some 0.75% from Thursday's close of 5.8250. It firmed to 5.7580 earlier.

It had weakened to 5.9395 this week in anticipation of the sanctions, which turned out to be softer than expected.

Jason Tuvey, senior emerging markets economist at Capital Economics, said while further sanctions were off the table for the moment, things could still go wrong with implementation of the ceasefire.

"After the five days, there could be an escalation of conflict in northern Syria," he said, adding that this could lead to another strain with Washington and bring sanctions back into play.

U.S. prosecutors this week charged Turkey's Halkbank (IS:HALKB) with evading sanctions on Iran, a move which Turkey said was also related to its operation in Syria. Pence said he told Turkish officials that the case was a matter for the New York court that charged the bank.

Halkbank shares, which had plummeted following the news earlier this week, surged at Friday's opening, rising some 7.16%. They were up 6.21% at 1221 GMT.

The main BIST100 share index (XU100) was up 3.82%, while the banking index (XBANK) was up 5.93%.

Despite the ceasefire agreement, Republican Senator Lindsey Graham and Democratic Senator Chris Van Hollen will move "full steam ahead" with plans to impose stiff sanctions on Turkey.

House Speaker Nancy Pelosi said the House of Representatives would vote on a bipartisan sanctions package against Turkey next week.

Trump may try to veto or delay implementation of those sanctions, despite strong bipartisan support, Tuvey said, adding: "He seems to be taking a fairly soft line on sanctions against Turkey."


After the agreement between the allies eased pressure on the lira, expectations the central bank will cut interest rates at next week's meeting have risen again.

QNB Finansbank chief economist Erkin Isik said the recent volatility in the lira had lowered rate cut expectations.

"Considering the agreement reached about Syria and the appreciation of the lira, we expect a 100 basis point cut from the monetary policy committee next week," he said, citing improvements in inflation.

The central bank has already cut its policy rate by 750 basis points this year, after hiking it to 24% last year to halt a currency crisis. Governor Murat Uysal has said the rate cuts were front-loaded.

Inflation, which hit a 15-year high of more than 25% in October last year, declined to below 10% last month.

Ata Invest Director Cem Tozge said the bank could cut borrowing costs by between 100 and 200 basis points.

"When we look at both the swap pricings and the lira LIBOR pricings, we see that a 200 basis point cut in the next three months, starting with 100 basis points next week, is being priced in," he said.

Turkey's five-year credit default swaps, a gauge of the cost of insuring exposure to its sovereign debt, fell to 371 basis points on Friday, down from 385 basis points at Thursday's close, according to IHS Markit data.

Longer-dated government bonds chalked up gains, with the 2030 issue jumping 1.6 cents to 135.186 cents in the dollar, according to Tradeweb.

Dollar-denominated bonds issued by Turkey's second-largest bank Halkbank also gained, with the 2021 issue adding as much as 2.7 cents to 89.95 cents in the dollar.

Original Article

Forex - U.S. Dollar Slips as Euro Still Lifted by Brexit Deal

© Reuters.  © Reuters. - The U.S. dollar was lower against other currencies on Friday, while the euro was buoyed by hope that a Brexit deal will help mitigate risks of a recession in the bloc.

U.K. Prime Minister Boris Johnson made a deal with the EU on Thursday, which hinges on Northern Ireland applying a limited set of EU rules on some goods, with the U.K. only charging EU tariffs on goods passing through to EU markets.

The deal now must be passed by the British Parliament on Saturday. However, Northern Ireland's Democratic Unionist Party said it is opposed to the proposed agreement, making it uncertain if the deal will be approved.

GBP/USD inched up 0.1% to 1.2897 as of 10:56 AM ET (14:56 GMT) while EUR/USD was up 0.2% to 1.1139.

Meanwhile the U.S. dollar dipped, as traders remained cautious after data showed the impact of the trade war has taken its toll on China.

China’s gross domestic product grew 6% annually in the third quarter, which was the slowest rate in 30 years. The news comes on the back of China trying to get more concessions from the U.S. before it signs a temporary phase 1 deal agreed on last week.

The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, was down 0.2% to 97.172.

Elsewhere, the Turkish lira surged 1.4% to 0.1728 against the dollar after a five-day ceasefire against the Kurds in Syria was agreed on between President Recep Tayyip Erdogan and U.S. Vice President Mike Pence. However, reports have surfaced that the ceasefire may have already been broken.

Original Article

Venezuela September inflation accelerates to 52.2%: central bank

CARACAS (Reuters) - Venezuela's consumer prices rose 52.2% in September compared with 34.6% in August, the country's central bank said on Friday, adding that prices rose 4,679.5% through the first nine months of the year.

The country's gross domestic product contracted by 26.8% in the first quarter of 2019 with respect to the same period a year earlier, the bank said, part of an economic crisis that has forced more than 4 million people to leave the country.

The central bank stopped releasing basic economic indicators around four years ago, but this year has started doing so at irregular intervals.

The opposition-run congress, which began releasing its own economic indicators several years ago, said prices rose 23.5% in September. Generally, the legislature tends to report higher figures than the central bank.

President Nicolas Maduro blames the country's economic problems on U.S. sanctions and an "economic war" led by his political adversaries. His critics say failed state intervention in the economy and rampant corruption are to blame.

Original Article

Turkey says Kurdish militia kills soldier in northeast Syria despite ceasefire

Turkey says Kurdish militia kills soldier in northeast Syria despite ceasefireTurkey says Kurdish militia kills soldier in northeast Syria despite ceasefire

ANKARA (Reuters) - One Turkish soldier was killed and another was wounded on Sunday after an attack by the Syrian Kurdish YPG militia in northeast Syria's Tel Abyad, the defense ministry said, despite a deal to pause military operations as militants withdraw from the area.

President Tayyip Erdogan agreed on Thursday in talks with U.S. Vice President Mike Pence a five-day pause in the offensive to allow time for the Kurdish fighters to withdraw from a "safe zone" Turkey aims to form in northeast Syria near its border.

On Saturday, the truce was holding along the border, with just a few Turkish military vehicles crossing, a Reuters reporter at the scene said. But Sunday's attack has underlined how fragile the agreement is.

Ankara regards the YPG, the main component of the Kurdish-led Syrian Democratic Forces (SDF), as a terrorist group because of its links to Kurdish insurgents in southeast Turkey. The YPG has been a close U.S. ally in the fight against Islamic State.

In a statement, the defense ministry said an attack by the YPG with anti-tank and light weapons had struck Turkish soldiers carrying out a reconnaissance and surveillance mission in Tel Abyad on Sunday.

"The immediate response based on self-defense was given," the ministry said. "Despite the Safe Zone Agreement with the United States... 20 harassments/violations were committed by PKK/YPG terrorists," it said.

On Friday, the Kurdish militia accused Turkey of violating the five-day pause by shelling civilian areas in the northeast and the border town of Ras al Ain.

A senior Turkish official later dismissed the accusations on Saturday, saying these were an attempt to sabotage the agreement between Ankara and Washington, and that Turkey fully supported the deal.


Erdogan warned on Saturday that the offensive would continue and Turkey would "crush the heads of terrorists" if the deal was not fully implemented, while Turkey has insisted that it is the duty of Washington to ensure the withdrawal of the YPG.

Turkey's defense ministry said late on Saturday that it was closely monitoring the withdrawal of the YPG and that it was in close contact with U.S. officials over the issue and to provide logistical information.

Turkey aims to establish a "safe zone" some 32 km (20 miles) into Syria. Erdogan said on Friday it would run for some 440 km along the border, though the U.S. special envoy for Syria said the accord covered a smaller area where Turkish forces and their Syrian rebel allies were fighting.

Erdogan also said on Friday that Turkey would set up a dozen observation posts across northeast Syria, and that he would hold talks with Russian President Vladimir Putin on what steps to take in the planned "safe zone" next week.

Original Article

South African power ends Japan's fairytale run

TOKYO (Reuters) - A powerful South Africa ended the hopes of millions of Japanese rugby fans when they ground down the host nation 26-3 in their Rugby World Cup quarter-final at Tokyo Stadium on Sunday.

Japan had set their home tournament alight with a scintillating style of organised chaos that swept them through their pool unbeaten with victories against tier one nations Ireland and Scotland.

Their fairytale run, however, ended against a formidable Springboks defensive effort that slowed the Japanese speed, while the South Africans, who only led 5-3 at halftime, relied on halfback pairing Faf de Klerk and Handre Pollard to keep them pinned in their own half.

The Springboks, who scored three tries - two from winger Makazole Mapimpi - but wasted a string of other chances, will now face Wales in the semi-finals in Yokohama next week after they recorded a 20-19 victory over a 14-man France, who had lock Sebastian Vahaamahina sent off at Oita Stadium earlier on Sunday.

Original Article