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Halloween Brextension – Trick or Treat?

Last week, Theresa May managed to secure yet another extension to the UK’s Brexit deadline – flexible in nature, the new deadline will be 31st October 2019.


With many EU leaders favouring a much longer extension, the emergency meeting in Brussels took over 6 hours to come to its decision; French President Macron took a tougher stance, pushing for a shorter deadline so it seems that 6 months is much of a compromise. European Council President, Donald Tusk also issuing a stark warning to the UK, not to waste any time in reaching a deal. To be fair, UK has had a poor record of taking heed to these types of warnings.


This does mean that should British MPs not pass a withdrawal agreement by 22nd May, the UK will have to participate in European parliamentary elections in May (23rd-26th) or risk leaving the EU on 1st June without a deal.


On balance, it would appear...

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What is holding up the dollar?

Over the past six months, we’ve seen a notable shift in US interest rate expectations. Back in September 2018, the market was expecting three rate hikes from the Fed in 2019. By November, this had fallen to two hikes and at the time of writing the market has fully priced in a 25-basis point rate cut by the end of 2020 (with a 53% probability of a cut by the end of 2019). Conventional wisdom would lead us to thinking that the impact on the dollar should be negative (since a lower yield or even expectations of a lower yield, makes the dollar less attractive to investors).



However, a quick look at a chart of the US Dollar Index below shows that on a trade weighted basis, the dollar has been remarkably stable over the past year and if anything, has made a small advance in recent months.


Chart 1: USD INDEX...

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Is a US recession going to awaken currency volatility from its slumber?

Much of last week’s media coverage centred around the potential for an imminent global slowdown/US recession. The excitement was largely triggered by the less hawkish Fed on Wednesday – it appears bad news is no longer good for equity markets. To be fair, whilst sentiment is becoming more cautious, it is not quite the panic seen at the end of 2018.

So what exactly did the Fed say? Essentially, they pivoted their monetary policy to take a more dovish posture, signalling that they are unlikely to raise rates at all this year, compared to the two 2019 hikes foreseen for most of last year. Furthermore, they also confirmed they will reduce the pace of their balance sheet reduction. This came as no real surprise, and US stocks initially rallied before selling off once the market digested what the Fed actually said. In recent years, bad data would have sent risk higher...

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