ECB upcoming rate decision and Brexit talk are bringing more volatility; CNY likely to appreciate as November exports accelerate trade surplus

• ECB rate decision will conclude on Thursday, with no change anticipated
• China November exports generate record trade surplus, leading to expectations of CNY appreciation
• DXY Index edged modestly higher to start the week as GBP/USD plunged

ECB rate decision will conclude on Thursday, December 10th. According to a Bloomberg survey, no change in the main interest rate is expected, though other stimulus measures are possible. If ECB eventually decides to cap Euro gains, it is less likely that they will do so via the interest rate channel. Recall that on Wednesday November 11th, ECB President Christine Lagarde said that, “while other options are on the table, the pandemic emergency purchase program and targeted longer-term refinancing operations have proven their effectiveness.” Thus it is reasonable to anticipate more QE and less rate cuts on the way.

China’s November exports surged at the fastest pace since February 2018, driven largely by medical devices. The trade surplus soared to a record of $75.4 billion, propelled by US consumer demand. Exports to the U.S. rose 46% despite tariff hikes, and total exports rose to $268 billion, showing a strong acceleration following October’s 11.4% growth. Chinese government believed that the exports have benefited from the economy’s early reopening after the COVID pandemic, relative to other regions of the world. It is likely that CNY will further appreciate in the months ahead, with a possibility to break below the 6.50 USDCNY level. However, it is worth noting that PBoC has fixed the CNY reference rate stronger than expected in only 6 out of the last 20 days, indicating a preference to slow the gains. Near-term gains in CNY will probably be more USD dependent rather than Chinese data dependent.

In terms of USD, a sharp slide by GBPUSD has helped offset USD downside and brought a modest rise. Nonetheless, GBPUSD and EURUSD will be center stage this week. Brexit talks are intensifying as political situations complicate, and the possibility of no-deal is growing stronger daily. The Euro and British Pound comprise 57.6% and 11.9% of the US Dollar Index, so expect that more volatility in the FX market is on the way.