Talking Points:
- Remarks after the EU-27 Summit on the Brexit sent the British Pound tumbling and the Euro in sympathy
- Risk aversion has yet to collapse under its weight, but the threat grows with volume and volatility holding
- The Fed and BoJ rate decisions this week can generate exceptional volatility and tip critical financial trends
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We ended off this past week with another surprising jolt of volatility. However, where the sudden surge in activity for the previous week end was centered on equities and volatility through a 'risk theme', this move was concentrated on a few currencies. The motivation was the EU-27 leaders summit in Bratislava where the topic of discussion was the Union's future and negotiation stance with the Brexit discussions with the UK. As expected, the official view was one where the EU would not allow the withdrawing member to 'cherry pick' from the privileges those that remain. What truly unsettled was the speculation that the United Kingdom was preparing to withdrawal from the single market - which even EC President Donald Tusk weighed in on. The Sterling suffered the worst of the impact with the Euro falling in sympathy. The Dollar, in turn, drew the greatest benefit.
The Brexit path will be long and winding with considerable impact on those markets and currencies directly in its gravity, but there is limited immediacy to the theme. Short of key updates in position and rhetoric around the negotiation approach from the UK and its collective counterpart, the volatility will fade and perhaps the deep discount with it. That may offer trade opportunities in itself so long as it further conforms to the broader trading landscape. As it happens, the horizon looks treacherous for the global markets ahead. The combination of the Federal Reserve and Bank of Japan rate decisions ahead look like a financial Mt. Everest. Both meetings carry critical weight for their respective currencies and assets; but they also tap far deeper fundamental wells of systemic stability.
On one end of the monetary policy spectrum, the BoJ is deep in an aggressive easing campaign and quickly losing its credibility. There is seemingly no scenario where the policy authority can salvage its sway over investors; and that will position the market for a critical evaluation that can return the Yen crosses to trend rather than consolidation. At the opposite end of the scale, the Fed will announce a rate decision under heavy skepticism of a hike (20 percent according to Fed Fund futures) and release its updated forecasts. A turn to easing to conform to its major counterparts, a push to wider divergence or un-mooring of confidence in this most critical monetary policy player can readily turn this into a robust, sentiment-focused driver. We look at a markets on the cusp of volatility and facing critical event risk in this weekend Trading Video.
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