In our Investment Bank Outlook each week, we bring you a selection of perspectives from leading investment banks to outline the key issues and directional views for the week ahead. These excerpts, taken from research notes, will cover issues such as key market themes, economic releases, as well as any major trends and levels to watch. Please note, this material, which does not reflect the opinions of Tickmill, is provided for educational purposes only and should not be taken as an investment recommendation.

Citi

GBP sees Brexit noise return. Headline noise is inevitable. 

–    UK PM Boris Johnson will give a speech on Brexit today to confirm he is ready to accept the “off-the-shelf” Canada trade deal model, but will insist the European Court of Justice has no jurisdiction over Britain “at all” after December 31, according to reports. BBC News has excerpts. The government will also reject any deal with the EU that includes “high alignment” on rules.

–    Michel Barnier will also launch the EU’s draft mandate for negotiations with the UK with a press conference. This is is expected to aim at maintaining a level-playing field and close trading relations.

  • CitiFX Strategy thinks this could weigh on GBP in the short-term, especially as our metrics suggest short-term market positioning is long. We maintain a bullish medium-term bias for GBP, but like hedging long positions with 1w EURGBP calls or risk/reversals as outlined in Monday Macro FiX.
  • We will also look out for a date – a special EU summit will be held in February to formally begin the future relationship negotiations.

USD: Eyes on Iowa.

  • Today, the Iowa Caucus kicks off US Democrat Primaries – read our all-encompassing Cheatsheet for more All about the Iowa Caucus.

–    This marks the first major event for the Democratic nomination primary season but is difficult to predict as the process allows individuals to re-align their support for candidates throughout the night. The Caucus kicks off Monday (NY time, 20:00 EST) but this is Tuesday in London. Results are not expected until early Asia Tuesday ~4:00 GMT. The market will receive three rounds of results.

  • The final CNN/Des Moines Register poll was not released as the results may have been compromised. The Buttigieg campaign claims Pete Buttigieg was excluded from at least one call during polling. The pollsters are investigating the claim but in the interest of accuracy have decided not to release the results.
  • On the data side, we have ISM manufacturing at 15:00 GMT. A pick up is forecasted thought Chicago PMI data has challenged some optimism – Citi Economics expects 49.1 vs 47.8 prior. We also have Construction Spending for December which is anticipated to dip to 0.4% vs 0.6% prior.

AUD: Looking ahead to the RBA.

  • Strategist Dan Tobon says that this meeting should see the central bank on hold and a relatively unchanged statement, which could be interpreted as hawkish relative to market pricing across the curve.  Lowe’s speech the following day (Wednesday) will be of greater focus for us, where we expect greater emphasis on downside risks due to domestic and global factors. A marginally unchanged statement could therefore see AUD rally on Tuesday, which would provide better level for shorts into Lowe’s speech.
  • We expect the RBA to remain upbeat, as recent data has supported their view that “the Australian economy appears to have reached a gentle turning point”. Market pricing for near-term policy expectations have reduced significantly. There are 3bps of cuts priced for next week’s meeting, and a further 7bps priced for the March meeting. Despite this, the broader rally in rates driven by the coronavirus has flattened the curve, pricing a premium to reflect downside risks to global economy.

Danske Bank

FX markets

Also in FX markets the key topic is the spread of the coronavirus, the magnitude of the negative impact on growth and the policy response. Most notably, the short end of the US curve was heavily offered on Friday sending EUR/USD FX forwards sharply lower. At close on Friday the market priced more than a 50% chance of a Fed cut in April. We think it has further to go as we are looking for a 25bp Fed cut in April.

In the very short term the key thing for FX markets is the return of US recession fears, as this has brought about a spike in FX vols (broadly) and a weakening of the broad USD. This is in stark contrast to price action a couple of weeks ago when the USD strengthened even in an environment of lower short-end USD rates (and spreads), as US tech stocks outperformed traditional industry and commodity performers. As recession fears return and uncertainty rises, we should expect negative news flow to weigh on commodity currencies, SEK and USD at the expense of a stronger CHF and JPY. A positive news flow should have the opposite effect.

GBP did not react much to the leaks of PM Boris Johnson’s Brexit speech but we still think EUR/GBP is set to move higher eventually due to (1) elevated political uncertainty and (2) a rate cut from the Bank of England because of sluggish growth.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

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