Our weekly newsletter was so good last week we decided to send it out to you twice. Apologies for that. The wonders of technology.
The Rio Olympics are finally underway. Unfortunately, the stadia looks as empty as Jeremy Corbyn’s Shadow Cabinet did a few months back. The beach volleyball was good though.
From Rio to the BoE. As expected, interest rates were lowered on Thursday and we expect a further cut that will bring us down to around 0.1% by end of year. Mark Carney, the BoE Governor, has said we won’t be delving into negative interest rates. Will the cut give the UK the shot in the arm it needs post Brexit? Will the Banks pass on the rate change to their customers whilst their margins are being cut? Granted, the mechanism has been put in place to enable them to do so but we’ll need to wait and see. The Bank of England had to cut rates after all the indicators pointed to the not wholly surprising downturn for the UK that will gather further momentum in the coming months.
In addition to the interest rate cut, QE was expanded by 60 billion raising the total amount to 435 billion. Have we fired all the bullets in terms of monetary policy? The Bank will buy up corporate bonds as well as buying more government gilts. This should make it cheaper for companies to borrow. Again, we’ll need to wait and see if this has the desired effect. Inflation is going to start to creep up and may surpass the 2% target rate. Expect your trip to the supermarket to become more expensive.
Question now is will we see a change of tact in terms of fiscal policy? Will infrastructure projects gain in popularity to aid the economy? Perhaps. However, infrastructure projects, whilst undoubtedly good for the economy long term, aren’t exactly a quick fix to stave off the impact of Brexit on the economy in the coming few months/years. Deficit/austerity cuts? Expect these terms to be consigned to the previous Government. Philip Hammond, the Chancellor of the Exchequer, will have a large bearing on the direction of the UK when he gives his Autumn Statement. The Bank of England can only do so much. The Government has to steer us quickly and correctly on the right path. Do we expect Theresa May to initiate Article 50 anytime soon? No chance. Until the UK has a plan in place we’ll be kicking that issue down the road.
What does all this mean for Sterling? Apart from Peaty winning a gold in the swimming I don’t see much good news anytime soon for the UK. This will translate to further Sterling weakness. I expect us to be under 1.30 on GBP/USD (Cable) in the near future. Whether you are selling or buying dollars you should look to cover off some of your exposure as soon as you have capacity. If you are selling Dollars back to Sterling then execute some on a SPOT or Forward Contract basis and then stagger orders to the downside at 1.30 then 1.2969. Rates to convert USD into GBP are the best they’ve been since Top Gun came out in the Cinema. Last week we traded around 1.3350 then had Sterling drop off after the Bank of England. The downside trend continued after we had the NFP (Non-Farm Payroll) figure released from the US. The number of jobs added were 255K for July giving further weight to the US Dollar. The unemployment rate came in at 4.9%. You can see the downside move in Cable (GBP/USD) on the graph below -
If you are a USD buyer I would consider locking in some at current levels if you have a requirement. I expect GBP/USD to come off over the coming months as expectations for a rate rise increase. Please contact myself or one of the trading team for a rate of exchange. Rate rises aside, the main event for the US is the election in November. There will be increased volatility for the US Dollar from September onwards as the Battle Royale between Clinton and Trump intensifies.
GBP/EUR staged a recovery last week threatening 1.20 the figure although the upside dissolved after the Bank of England. We’re on the back foot again. You can see the movements on GBP/EUR last week on the graph below –
I don’t expect Sterling to come off too much further against the Euro as problems in the Eurozone will linger for some time yet. I’d expect GBP/EUR to trade in a range of 1.15-1.25 for the remainder of 2016. If you are a buyer of EUR please contact one of the Aston team and we can discuss levels to aim for to the upside. If you have some time to play with this is the best course of action.
EUR seller? Look to convert back to GBP on a SPOT or Forward contract basis. You’re in a fantastic position compared with the last couple of years. Contact one of the team or myself for a rate of exchange.
This week is a subdued one in terms of releases and data so we may see some range bound trading with moves less exaggerated. We have Retails Sales out of the US and GDP figures out of the Eurozone that will provide some movement on the US Dollar and the Euro.
If you have any upcoming requirements you would like to discuss please do let me know.
Have a fantastic week.
Written by Liam Alexander