ACM Update Monday 23rd March 2020

Expect another week of cheerful nihilism. Markets will be driven by coronavirus developments and a continuation of the extraordinary volatility last week is expected to continue.

A flight to safety will persist so we expect to see the US Dollar hold its current value if not strengthen further against Sterling. The UK cut interest rates to their lowest ever level last week, the second cut this month, from 0.25% to 0.1%. In addition, the Chancellor has introduced a raft of quantitative easing measures although I suspect there will be further stimulus needed and subsequently introduced. Cash will need to filter down to the pocket of businesses as they’re the ones on the sharp end of a lack of liquidity. Once this happens then we may start to turn the tide economically.

Of course, as many commentators have said, this is a marathon and not a sprint. We’re not past mile 3 yet.

You can view the movements on Cable (Sterling/Dollar) in the graph below –

 

If you hold US Dollars and need to move into Sterling do consider executing a trade at current levels on a SPOT basis. As I’m sure you’re all aware we are now trading at the best levels since 1985. If you would like a rate of exchange please get in touch with a member of the Aston team and they can assist you. If you would like some certainty for the next three or six months think about implementing a Forward Contract with us. This will mitigate your currency risk through an extremely challenging landscape and provide a level of certainty from an FX perspective. Again, please get in touch with either myself directly or a member of our trading department and they can walk you through pricing/technical levels/margin requirements.

If you are on the other side of the trade and need to purchase USD from GBP I would look at drawing a line in the sand at current levels. Yes, rates to purchase USD from GBP are dreadful. No-one can say otherwise. However, we could quite easily drop below 1.10 on GBP/USD. I think calls for parity are overdone although they can’t be ignored. Once you have a rate of exchange to work from then consider implementing take profit orders to the upside to take advantage of any relief and change of trend on Sterling/Dollar. Whilst I think there is further downside to go in this move a short sharp move higher can’t be discounted either. We are experiencing daily percentage point movements on the major currencies so nothing can be assumed.

What I will say is that you need to operate from a position of caution around your currency requirements. The Bank of England Governor described markets as “borderline disorderly” last week.

In terms of Sterling/Euro the trend is similar to Sterling/Dollar although not as severe.

You can view the movements in the graph below -

Sterling has taken a massive hit from now what seems like fanciful levels of above 1.20 the figure. I don’t expect GBP/EUR to fall much below 1.05 although, again, this may ultimately prove completely incorrect. The UK Government, it seems, may put in place more draconian measures to limit personal movement and implement a ‘lockdown’. If people can’t put their sensible hats on then ultimately the Government will need to act. This may push Sterling lower short-term.

A global recession is inevitable. Q2/Q3 are going to be extremely challenging for all of us although we may look to emerge from this in Q4 this year. In what manner we emerge is open to debate at this point. This is going to be a long climb.

If we at Aston can help in any kind of way please do let us know. Our team are on hand to answer any questions and concerns you may have around your currency exposure.

Please keep in touch and we wish all our clients the very best in these challenging times.

 

written by

Liam Alexander

Liam Alexander is the CCO at Aston Currency Management.