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Brexit worries resurface

Disagreement

Those who thought that getting Brexit done was accomplished last Friday night will have been surprised and dismayed by yesterday's altercation between Britain's Prime Minister and the EU's chief negotiator. Investors feared that Johnson was setting the scene for a future no-trade-deal non-relationship with the EU.

Where the pound had been pushed back from last week's gains in early Far East trade, it turned into a rout when London got going. By teatime sterling had lost a cent and a half each to the euro and US dollar, negating the advantage it had gained from Thursday's Bank of England rate decision. On the day sterling is an average of 0.9% lower against the major currencies.

In essence, Michel Barnier's stance was that a "highly ambitious" trade deal is on offer if Britain signs up to rules preventing unfair competition; Johnson's position was that Britain does not intend to undermine EU standards and will not sign up for rules to enforce them. The market's interpretation was that Johnson would be willing to walk away with nothing rather than follow European standards; hence the pound's plunge.

 

Breakeven

Brexit worries outweighed a better-than-expected purchasing managers' index reading from Britain's manufacturing sector. At 50 it was fractionally higher on the month and on the cusp of growth and shrinkage.

Britain's reading of 50 was by no means the strongest of the day but it was one of the best in Europe, outpacing Germany's 45.3 and the euro zone's 47.9. Once again, it was Greece that delivered the best result with a 54.4. Sweden logged a 51.5 and Switzerland's SVME index came in at 47.8.

Across the Pond, Canada's 50.6 reflected "subdued manufacturing conditions" and the United States' 51.9 was held back by falling exports. At 50.9, the historically more important US measure from ISM represented a 129th consecutive month of growth.

 

RBA sticks

As generally expected, the Reserve Bank of Australia decided this morning to keep its Cash Rate benchmark unchanged at 0.75% for a fifth month. The Australian dollar responded positively, becoming the day's top performer.

Although the consensus among analysts had been for no change by the RBA, the economic shock of Wuhan coronavirus had raised at least a suspicion that the RBA might react cautiously with a rate cut. The bank's statement acknowledged the risk but said it was "too early to determine how long-lasting the impact will be". It "remains prepared to ease monetary policy further if needed" but evidently sees no urgency.

In the eye of the storm, between yesterday's manufacturing PMIs and tomorrow's readings from the services sector, today's agenda is fairly light. Britain prints its construction sector PMI, Italy reports on inflation and the United States on factory orders. The most important numbers are the quarterly ones tonight for New Zealand jobs.

GBP: No-trade-deal Brexit risk increases

GBP: No-trade-deal Brexit risk increases

CHF: Manufacturers continue to slow

CHF: Manufacturers continue to slow

CAD: Subdued manufacturing conditions

CAD: Subdued manufacturing conditions

USD: 129th consecutive month of growth

USD: 129th consecutive month of growth

AUD: RBA rate decision tonight

AUD: RBA rate decision tonight

NZD: Employment data tonight

NZD: Employment data tonight

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