Sterling Charges Ahead on Brexit Hopes

Prospects of a deal with the EU has
sent sterling to its best level in two months against the dollar.
reached $1.3430 in early European turnover.  It had sunk to nearly $1.3220
yesterday as European markets were closing, which was a four-day low.   It
is the strongest of the major currencies today, gaining about 0.4%.  With
today’s gains has met our retracement
target near $1.3415.  The momentum appears to give it potential toward
$1.3500 in the near-term. 

Sterling has been trending higher since the middle of the month, largely
as a function of the broad dollar weakness.  However, the move over the
past 24 hours is the reports that suggest the broad terms of the financial
agreement has been reached.  The UK
will pay 45-55 bln euros and may have contingent exposure for that amount again
(total as much as 100 bln euros). EU negotiators are warning that a final
agreement on funds has not in fact been reached. 

The Irish border issue has not been
  There is a sense that some minimum effort by the UK
on this in the coming days will suffice
for the EU, and Ireland would be understood to be under pressure to
accept.  That does not mean that the Irish will capitulate, and the issue
is additionally complicated by Prime Minister May’s reliance on the Democrat
Unionist Party after having her parliamentary

The increased possibility that a broader Brexit agreement will be achieved, that is to say, the UK will leave with an agreement in hand and be less
destabilizing appears to be impacting perceptions of monetary policy.
Investors have pushed up the implied
interest rates in the short sterling futures market with the term
steepening.  It appears that another rate hike is being priced at Q4 18.  Recall that when the OECD revised down
UK growth forecasts earlier this week, it
emphasized the uncertainty over
Brexit.  While the agreement on the financial obligation is important,
many hurdles and uncertainties remain, suggesting expectations may be

Many observers expressed alarm over North Korea’s ICBM test. 
The yen strengthened.   Korean stocks eased even though the MSCI Asia
Pacific Index rose 0.25%, for the first increase this week.  However, what
many seem to miss is that this test makes progress possible.  First, the
missile test suggests that North Korea has acquired the capability of striking
the entire US mainland.  North Korea’s leader said that with this test,
the nuclear program is complete.  That suggests further tests are not necessary.  Does it still need to
develop some features, like re-entry?  Reports suggest perhaps. 

This is not a question certainty,
but strategic ambiguity. 
It is like Israel traditionally refusing to
confirm whether it has nuclear capability.  It adversaries must assume it
does.  North Korea now has a face-saving
way to stop its ICBM tests.  This
will allow the US to claim victory
too–“better behaved North Korea.”  And a greater sense of
stability in the region.  

Turning to the eurozone, ahead of tomorrow’s aggregate figures, Spain and
German have released CPI figures.
  Spain’s CPI was a touch less than
expected, rising 0.3% in November, and an unchanged 1.7% pace
year-over-year.  The median forecast for
the Bloomberg survey was 1.9%.   Germany state reports were firm with a
0.3%-0.4% monthly increases.  The national report will be released later
today and the year-over-year pace to accelerate to 1.7% from 1.5%.  

The euro is trading with a firmer tone after slipping for the past two
  It is trading within yesterday’s ranges.  Initial
support is seen near $1.1825, and resistance pegged in a 10-tick
band on both sides of $1.1900.  European equities are moving higher. 
The Dow Jones Stoxx 600 is up about 0.7%.  Utilities and financials are
leading the way.  Energy, consumer staples, and health care are the main drags.
  Sterling gains appear to be weighing on the FTSE 100, which is off 0.6%,
but the FTSE 250 is up 0.3%.  

Oil is off for a third consecutive session.  The main weight is
coming from concerns that the higher prices may sap the willingness of some producers
to extend cuts as long as some have anticipated.  The price of Brent has
doubled since early last year.  While Saudi Arabia has support at the nine-month extension of the restraint agreement
that expires at the end of Q1 18, others may seek a six-month extension.  Also,
the industry estimate saw an increase in oil inventories in the US.  The
government release will be watched today, as many expect a sharp drawdown of nearly 2.5 mln barrels. 
Inventories fell 1.85 mln barrels in the week ending November 17, and that
followed a two-week increase (total of nearly 4.1 mln barrels).  

In a vote along party lines, the US Senate Finance Committee approved the
tax proposals, setting the stage for a vote by the entire Senate as early as
It promises to be a close vote.  The price of securing
some Republican Senators has been to agree to some automatic tax increase if
revenues fall short of what is projected
appears to be alienating others.  The trigger that has reportedly been agreed is a 1% rise in the corporate tax
rate if revenues fall short after five years. Other Senators seem to be balking
at the idea of being locked into tax increases in what could be adverse
economic conditions, like a recession.   Others seem to object because it injects unnecessary

The Republicans have a 52-48 majority in the Senate.  They can
afford to have two defections (with the Vice President then casting the
tie-breaking vote).  If the bill passes the Senate, the next step, which
could begin next week, is the reconcile the House and Senate version. 
They are several important differences, but it is generally assumed a deal will be
struck, even if the precise details are not known.  

The US is expected to report an upward revision to Q3 GDP.  It is
expected to be helped by consumption and inventories. 
Growth may
exceed 3.0% at an annualized rate for the second consecutive quarter and this
quarter also looks to be tracking a little north of 3%.  Pending home
sales are expected to have recovered in October after a flat
September.   Yellen appears before the Joint Economic Committee of
Congress.  Like Powell’s confirmation hearing yesterday, we do not expect
the new ground to be covered by Yellen
today.  Dudley speaks in the NY morning on the US economy.  His views
are already known, and he is optimistic about
continued above-trend growth and rising
inflation.  The Fed’s Williams speaks at
lunch in Arizona, and Kashkari hosts a Q&A on Twitter late in the


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