This referendum malarkey is proving more unpredictable than the Cornish weather. Are we staying in or are we leaving? The squabbling ends in 10 days time regardless. We'll either have the status quo or we're off for a wander down a coastal path in the dark, without a torch whilst wearing flip flops.
Last week the FX markets were exceedingly dull with range bound trading in most of the majors. Things started to liven up a little towards the end of the week with Sterling coming under pressure. Sterling has been given an almighty thump over the weekend and in today's early trading with concerns that the 'Leave' campaign are gaining more of a footing in the referendum debate. As mentioned at the beginning of the month I thought we would see a pull back in GBP as we approached June 23rd and this is proving to be the case. I expect GBP to suffer further losses throughout this week although we will of course have various spikes on an intraday basis on the back of various data releases and central bank meetings. The beginning of next week? It will be extremely volatile and I expect to see some fairly severe movements. Have you protected against downside risk? Have you put a strategy in place? Have you discussed levels to consider on a market order basis through periods of volatility? If you haven't, please do contact a member of the Aston team early this week. The FX landscape could look entirely different in the coming weeks.
If you look at the GBP/EUR graph below you can see the downtrend commencing towards the end of last week. Will we break 1.25 the figure as I suggested a few weeks ago? There is every chance and if that gives way then it opens the door to a sizeable downside move.
If you are a buyer of Euro's from GBP please do consider locking in some at current levels. Will we see a bounce in Sterling if we remain? Of course we will. Is it going to be a 5-10% shift higher? Highly unlikely. We'll probably push back up 2-3% and settle around 1.30 or so. Can you afford the alternative? I'm not telling you anything you don't know already; Sterling is going to fall quicker than the French barricades at the Euro's.
If you are a Euro seller into Sterling I would suggest taking advantage of the recent move in your favour. I would cover off a large chunk of your EUR holdings at current levels this week and leave yourself a small amount on a market order basis to take advantage of any further volatility. Please contact myself or a member of the trading team to discuss SPOT deals and appropriate levels to aim for on a market order basis.
On GBP/USD, the giddy heights of 1.45 seem a lifetime ago. I expect us to challenge the psychological level of 1.40 the figure towards the end of this week/beginning of next. Why? Further uncertainty on the referendum is going to weigh on Sterling and with the Federal Reserve meeting this week in the US I expect Janet Yellen to remain consistent and offer a view that is both upbeat whilst acknowledging there is some improvement to be made. We'll also get an overview and perhaps some clues on future rate hikes and dates. This will likely strengthen the US Dollar so we're likely to see a double whammy to the downside on Cable (GBP/USD).
The graph below shows the beginning of the move lower on GBP/USD. I expect this trend to continue this week.
The message on GBP/USD is similar to the one above on GBP/EUR. If you are a buyer of USD consider purchasing a large percentage now. Yes, the rate isn't ideal although if we do leave the EU I would expect GBP/USD to trade anywhere from 1.25-1.35. What are your costed levels? Have you protected yourself from this risk? Please contact myself or one of the trading team this week to discuss your options.
If you are a seller of US Dollars into GBP fill your boots at current levels and leave yourself a small amount on a marker order basis. If you send me an email or give one of the trading team a call we'll be able to suggest levels that are realistic to achieve in a specified time period.
If you hold Aussie Dollars or Canadian Dollars and need to convert these back to Sterling now is an opportune time to do so after the recent fall in Sterling. If you have any questions on any other currency pairs please do get in contact and we can discuss a strategy tailored specifically to your needs.
As mentioned above we have the Federal Reserve meeting this week and we also have the Bank of England meeting on Thursday. There won't be any change on policy although any discussions on the referendum may prove to be damaging for Sterling.
If you have any questions please do get in touch.
Have a fantastic week.
Written by Liam Alexander