Capital Markets: "Pound Punished in High Drama"

From Marc to Market:

Overview: A showdown between UK Prime Minister Johnson and Parliament over Brexit pushed sterling below $1.20. The euro is extended its losses after finishing last week below $1.10. Growth concerns are seeing equities retreat. Japanese and Chinese shares managed to eke out gains, but the Asia Pacific and European stocks have been sold. The Dow Jones Stoxx 600 has been turned back from key target reached yesterday and is snapping a three-day advance today. US shares are trading heavily in Europe, and the S&P 500 may open more than 0.8% lower. Benchmark 10-year yields are falling three-six basis points today, with some European bonds, like Germany, Netherlands, and Italy falling to new record lows. The dollar is broadly higher against most major and emerging market currencies. Although the Swiss National Bank does not appear to have intervened last week, the franc's safe-haven status pales compared with the Japanese yen. The yen is posting minor gains today, and the Australian dollar is also resisting greenback strength following news of its first current account surplus in a generation. Among emerging markets, the lower than expected CPI is spurring talk that Turkey has scope to cut rates again next week, and this is seeing some demand for the lira.

Asia Pacific
China continues to resist pressure on the yuan. The PBOC's dollar reference rate was set at CNY7.0884 vs. CNY7.0883 on Monday. Bank models had it closer to CNY7.1040. The dollar approached CNH7.1965, but participants pulled back from testing CNH7.20 for fear of triggering a more aggressive response by officials. Some are rolling positions into options, favoring CNH7.25 and CNH7.35 strikes. A couple of large US banks are forecasting CNY7.50 by year-end.

The Reserve Bank of Australia as widely expected left the cash rate at 1.0% today. Many expect a rate cut in Q4 19 and another in Q1 19. Separately, Australia reported a decline in July retail sales and its first quarterly current account surplus in nearly 45 years. Retail sales fell 0.1%. The median forecast was for a 0.2% gain after a 0.4% rise in June. Australia recorded an A$5.9 bln current account surplus in Q2, which was nearly four times larger than expected. The Q1 deficit was revised from a nearly A$3 bln deficit to an A$1.1 bln shortfall....

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