Yen and pound among top gainers on Brexit and air strikes in Pakistan

Summary:

• British pound rises following comments that PM May will prevent a no-deal Brexit
• Japanese yen moves higher in response to geopolitical tensions between India and Pakistan
• China’s Shanghai Composite adds to its tremendous gains made yesterday

No to no-deal Brexit

In line with comments we wrote about yesterday, now a no-deal Brexit is becoming less likely. According to people familiar with the matter Prime Minister Theresa May is considering a plan to postpone Brexit and stop the UK crashing out of the European Union without any agreement. This proposal is to be discussed on Tuesday as May is going to allow her Cabinet to express some opinions. If there are no objections, then the proposal could be submitted to the UK Parliament later today. Let us remind that we got earlier some reports from the European Union that it was going to extend a transitional period so as to avoid a contentious issue regarding the Irish backstop. While ruling out a no-deal Brexit seems to be better than leaving the block without any agreement, it could also extend a period of uncertainty and, by some, might be considered like a huge gamble. It is worth also adding that Jeremy Corbyn, the Labour’s leader, openly backed a new Brexit referendum on Monday. Tuesday could bring a bit more clarity on this topic but do not expect any breakthrough. What does it mean for the British currency? Although these revelations appear to be GBP-supportive in the short-term, pound traders will have to deal with heightened uncertainty beyond March 29. It will have some ramifications for the economy itself. More uncertainty and political mayhem is likely to further constrain investment spending and thereby hurt economic growth.

The EURGBP cross keeps declining in response to Brexit-related revelations. The pair is trading already close to the crucial demand zone which could provide some support for buyers. Source: xStation5

Geopolitical tensions rise

The Japanese yen is the second best major currency this morning while other EM currencies are on the back foot at the same time. This could be, in part, ascribed to a rise of geopolitical tensions between Pakistan and India. We got some reports overnight that an Indian aircraft crossed the line of control, the de-facto border between the two countries, and “released payload in haste”, according to Pakistan Army. The Indian aircraft destroyed a major terrorist camp in Pakistan. The latest reports also suggest that it killed 300 militants. There is no doubt that it could risk escalating more tensions between the two countries. Note that the last time the Indian jet crossed the line of control intentionally and publicly to conduct air strikes was 1971, according to Bloomberg’s reports citing Vipin Narang, an associate professor of political science at MIT. While the response from the yen has been quite benign so far, this topic seems to be worth keeping a close eye on.

The USDJPY slid overnight in response to tensions between India and Pakistan. Source: xStation5

In the other news:

• Fed’s Clarida said the US economy is in a good spot and therefore the Fed can afford to be patient

• Some ECB members mull over rate hikes to respond to the euro area’s deepening economic slowdown, Bloomberg reports