Will Sterling continue to move down or will it stage a comeback or will it do pretty much nothing at all? I expect a comeback but not quite on the scale of Rocky Balboa. It may Rise like the singer Gabrielle said it would, then stumble and stagger around the ring for a while. In January I expect it to fall slowly to the canvas then in 12 months’ time it may rise and land a few punches helping Sterling retrace its decline. Like the Prime Ministers surname there is a lot of ‘May’ in there.
Until March I don’t see the markets having any clear direction until we have some clarity on Article 50 and exit negotiations. Until then we’ll need to suffer the banality of people saying ‘Brexit means Brexit’. Really? Round of applause for stating the obvious. The terms now doing the rounds are ‘Hard’ or ‘Soft’ Brexit. Both are largely irrelevant until March when we find out what the UK strategy actually is. Whatever happens the UK is going to be in for a period of pain in the next few years. Only question is how much pain. Longer term might the UK prosper? There is every chance.
Last week we had the debacle of the last debate between Hilary Clinton and Donald Trump. Any future policy discussed? Not really. Insults? Absolutely. The sooner we get this risk event out of the way the better for all concerned. Continuing with the US a number of Fed officials indicated that they see a rate hike in December. Indeed, according to various analysts there is now a 64% chance of the US raising rates in December. It is about time they acted.
In the Eurozone last week surprise surprise the ECB kept rates on hold and the Asset Purchase Program at 80 billion. Draghi said there is “continued downside risks” – the same statement that has been said for the past 5 or so years. Will he pump in more QE? Most probably.
In the UK last week inflation rose to 1%, the highest level since November ’14. What is on the cards for Sterling now? I expect us to have a slight bounce in GBP after the continued moves lower. We have Q3 GDP data out of the UK on Thursday and I expect us to print 0.4% showing the UK economy has weathered the referendum result better than expected. These are the growth figures covering the period post June 23rd. Why is growth at this level? Partly, shopping. People are continuing to purchase. Weak Sterling has also helped British Exporters and in addition tourists are flocking to the UK. Will this rosy picture continue? I have my doubts. As someone said, we can’t base the UK economy on selling imported products like Belgian chocolate and Swiss watches to tourists for ever.
I don’t see Sterling falling massively between now and year end. I think most of the move has happened and we’re seeing some support. Come January however I expect Sterling to be sold off and we could then see further moves to the downside in the run up to March which is going to be the meaningful month for ‘Brexit’ to actually start to take shape. I think we’ll see Business Investment tail off beginning of 2017, Retail Sales will start to drop off once the weak Pound starts to drive up the cost of imported goods, borrowing costs by the Treasury will likely overshoot expected estimates by going down the Fiscal route of infrastructure projects, which is both a by-product and factor in the expected increased uncertainty around the UK/EU.
If you are holdings any currencies and are looking to convert back to Sterling I would suggest you cover off a portion now to mitigate some of your risk over the remaining months of 2016.
You can see the movement on Sterling/US Dollar on the graph below last week. We had the sustained downside move and we’re starting to see a small recovery –
Likewise, on GBP/EUR after the significant move lower we’ve settled into more of a range.
Ask yourself what you consider good value. Holding Aussie Dollars? You’re around 34% better off on a 12 month basis. Holding US Dollars? You’re at 30 year highs to go back into GBP. Holding Euro’s? It’s not long ago we would have been discussing levels around 1.40 the figure. Please contact myself or a member of the team to discuss covering off a portion of your exposure on a SPOT or Forward Contract basis.
If you hold Sterling and are looking to purchase Euro’s, US Dollar or other currencies consider implementing a market order to take advantage of likely spikes we will see on an intraday basis. We have had a small rebound on Sterling so consider a small portion on a SPOT basis and then implement market orders to leave yourself room to take advantage of any further moves in your favour. Please contact myself or one of the trading team to discuss appropriate levels to aim for.
This week we have Mark Carney, the Bank of England Governor, speaking tomorrow along with the ECB president, Mario Draghi. On Wednesday we have inflation data out of Australia followed by the aforementioned Q3 GDP data out of the UK on Thursday and rounding off the week we have GDP data out of the US on Friday.
If you have any questions or would like to discuss your upcoming requirements please do let me know.
Have a fantastic week.
Written by Liam Alexander.