GBP Rides on Uncertain Polls

China appears to be making an earnest effort to bridge trade deal gaps as Beijing moved to raise penalties for IP theft on Sunday. GBP is the only gainer vs USD since Asia's Monday open as opinion polls suggest the Conservatives could win with as much as a 48-pt majority in next week's elections. JPY and gold are the weakest over the last 17 hours of trading. CFTC positioning data showed a CAD-longs covering on murky messages from the central bank. The chart below shows the weekly performance of Invesco's high beta SPX ETF, which has the  highest correlation with the S&P500 index. The recent rotation towards industrials and cyclical sectors was largely behind the 8-week run up in indices, but a holiday-shortened week may give reason for a protracted pullback.  

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While most GBP bulls appear to be anticipating a Tories majority victory, a Tories win without majority (hung parliament) would depend on the make-up of the possible coalition. An unlikely Labour-Conservatives coalition would be GBP-negative, while a Tories-LibDem coalition is seen the preferred coalition scenario for GBP. A Labour-LibDem outcome would be the worst of these ouctomes. 

Risk trades are higher early in the week after China published guidelines for local governments to raise penalties for IP violations. The announcement was vague but points to genuine action from China, likely in the hope of completing a phase one trade deal.

On Friday, there was more evidence that the US economy is stabilizing. The Markit PMIs and the final U Mich consumer sentiment survey were all better than anticipated. In Canada, retail sales also beat the consensus.

The market has clearly voted that lower interest rates outweigh any trade uncertainty. The week ahead will feature the same hot-and-cold game on trade and tariffs. We hope for some kind of definitive news but with the US week effectively shortened to three days because of Thursday's Thanksgiving holiday, we could be facing a continued grind.

CFTC Commitments of Traders

EUR -63K vs -58K prior GBP -32K vs -28K prior JPY -35K vs -35K prior CHF -16K vs -15K prior CAD +29K vs +42K prior AUD -47K vs -41K prior NZD -35K vs -36K prior

The speculative market was whipsawed by the Bank of Canada in the past week. The market mis-read comments from Poloz and Wilkins who intended to convey that the central bank had room to ease in the next downturn as dovish. On Thursday, the loonie rebounded when Poloz said he was comfortable with rates where they are currently.