With an FX twist on the mythical conversation of the UK leader to the Russian leader in the 90’s - “How is Sterling doing at the moment?” “Good” came the reply. “Could you give me some more detail on that please?” “Not good”.
That pretty much sums up Sterling. As I’ve bored you to tears with for a long time I don’t see anything behind GBP structurally and that was before we had ‘Brexit’ (even though we actually haven’t had Brexit yet) followed by the recent ‘Flash Crash’ in the Asian session on Friday morning. We can talk up a weak Sterling but ultimately an export led recovery is going to be challenging to put into practice. Might it have been a ‘fat finger trade’ that caused the ‘Flash Crash’? If it was then we may as well turn off the lights. Markets are too sophisticated now for one trader to add on a few zero’s at the end of a trade for it to spark a 6.1% collapse in a few minutes. As has been widely reported it is likely to be an algorithm gone wrong coupled with comments from Francois Hollande on ‘Hard Brexit’. Could it have been something else? Possibly. The trouble for Sterling now is confidence. What else is in store for Sterling? Even after Sterling ‘recovered’ on Friday Sterling/Dollar was still down 4.2% for the week.
If you look at the graph below you can see the movement on Cable (GBP/USD) last week –
Where now for Sterling/Dollar? We’ll likely enter a consolidation phase for the next few trading sessions and may even see some profit taking giving a bounce on Cable (GBP/USD). However, I expect this respite to be short-lived. I forecasted that once we broke through 1.25 the figure to the downside we would open the door to the 1.20 level. Yes, we broke through that support and traded at 1.1841 on the back of the flash crash (some reports suggested we actually printed around 1.13 on GBP/USD). I think we’re going to see a sustained move through 1.20 in the coming weeks. If you are a USD seller please get in touch with a member of the Aston team and we can discuss appropriate levels to aim for on a market order basis. In addition, do consider converting some of your exposure on a SPOT basis to mitigate some of your risk and take advantage of the recent moves. Contact me to discuss securing a rate of exchange.
USD buyer from Sterling? As we’ve been saying for a while, doing nothing is speculating. Rates are not looking great. There’s no point in dressing it up. The question to keep asking yourself is “Can I afford Sterling to weaken another 4-5% by year end?” As recent moves have indicated another significant move lower is not out of the question. Indeed, I would suggest it is more likely than not. We have a light calendar this week after the chaos of last week. In terms of data last week the NFP (Non-Farm payroll) figure came in slightly under expectations at +156 against the expectation figure of +172. It disappointed to the downside. However, are the US still adding jobs? Yep. Is the US still moving in the right direction? Yep. Will the Federal Reserve finally raise interest rates this year? Who knows. With dissenters building to keeping rates on hold I think the expectation is we may finally see a move at the end of 2016. Even though politics aren’t meant to sway the Federal Reserve’s decision I think we can safely assume there has been a conversation on what difference a Trump or Clinton win would mean. Once we get the US election as the next risk event out the way we’ll have a clearer direction on what is to come from the Federal Reserve. The only data of note this week is US retail Sales. I would expect a solid improvement so we may some further USD strength on the back if it. We may be in for some range bound trading this week so the market can catch its breath and see what is next on the cards.
Shifting over to Sterling/Euro the trend has evidently been to the downside. With Politics rather than economic fundamentals dictating moves we’re going to be in for further moves lower. With Theresa’s May stance on the single market taking an already bloody fight out of the ring and onto the street, I expect the blows to be traded more ferociously between the UK and the Eurozone in the coming 6 months.
We are trading at 5 year lows on GBP/EUR. From the beginning of September we’ve shifted from levels above 1.18 to trade just over 1.10 the figure. Might we push down to 1.05 on Sterling/Euro? Quite possibly. If we break through the 1.10 support level then that would be the next level to aim for. I think we’ll see strong resistance at 1.10 and I would expect a short-term shift higher in GBP/EUR on a consolidation move with limited data out this week.
You can see the moves on Sterling/Euro last week on the graph below –
Sterling has been hammered recently and I expect a small reprieve this week. If you hold Euro’s consider converting a sizeable portion of your exposure on a SPOT basis. In the space of a little over a month you are a little over 7% better off. Contact me to discuss securing a rate of exchange. Think we’ll move lower still? Contact me to discuss levels to implement market orders at.
If you purchase EUR from GBP then it is the same question as mentioned above – “Can you afford a further shift lower in the pound?”. My suggestion is lock in some Euro’s at current levels then you have a figure to work from. Should we see any spikes on an intraday basis on the back of any improvement in data from the UK or disappointing headlines/news out of the EU then we can look to take advantage of these upsides moves through utilising a market order. Please contact me to discuss your individual requirements and we can chat things through.
Currency markets are going to prove extremely volatile for the foreseeable future. Please get in contact to discuss your requirements for the remainder of Q4 and we can structure a plan to help mitigate your risk.
Have a fantastic week and any questions please do let me know.
Written by Liam Alexander.