Rate hikes to rate cuts, a global slowdown, plunging oil prices, a jump in gold prices, general flight to safe havens, cautious comments from Janet Yellen (Fed chairwoman), share sell offs, China concerns, pessimism around the balance sheets of some of the worlds largest banks, Scotland getting beat at rugby. Just another week in 2016.
You would be forgiven for thinking this was 2008 all over again. It isn't and fears are being exaggerated. The fact of the matter is the worlds largest banks are far better capitalised, engage in less risky activities, and are subject to far greater regulatory supervision. However, as soon as rumours emerge all rational behaviour goes out the window. Share prices will rebound once confidence returns to the market and with various finance ministers and chief executives of major banks buying their own stock, I would suggest we'll see a bounce in the coming weeks. Is it conceivable the sell off continues short term? With the fragility of markets at present anything is possible.
Not surprisingly, volatility on the major currencies has increased significantly. Only a few months ago it seemed everything was pointing in the right direction, we were going to see a succession of rate rises from the US with the UK expected to follow suit. I said in a previous report a few weeks ago that I thought a rate cut was a possibility, albeit a slight one, and I don't change my view on that. I do think Sterling is going to be in for a tough year in 2016, as I've bored you all with in previous reports. I have been bearish on Sterling for the best part of 12 months and unfortunately I don't see any reason to change my view on that. If we look at the graphs below on GBP/USD and GBP/EUR, with the exception of a few spikes and rallies to the upside the general trend has been lower on both these pairs.
Everything that is going on at present excludes the small matter of a US election and a possible 'Brexit' this year. Political uncertainty coupled with economic uncertainty is about as welcome as some of the made up and pointless phrases on social media like "thanks for reaching out" and other "buzzwords". What should you do to protect yourself from the inevitable volatility? Have a plan in place. You need to mitigate as much of your risk as possible whilst allowing yourself some room to take advantage of any upside moves. Please contact myself or one of the trading team to discuss a strategy out for the next three months.
If you are a US Dollar seller my suggestion is the same as last week. Convert a large percentage of your US Dollar holdings back to Sterling on SPOT. Might it go lower? Possibly. Although with the pace of the move lower it may quite as easily push back higher. As I always say, doing nothing is speculating. If you would like a SPOT price please contact myself or a member of the Aston team. If you are a US Dollar buyer from Sterling then you need to consider the possibility that we may push back towards 2009 lows of circa 1.35/1.36. What does that do to your bottom line? By utilising a mixture of SPOT, Forward Contracts and market orders this will allow you to mitigate your risk and leave yourself room for any market moves in your favour.
On GBP/EUR I think the next move is down to 1.25. If you are a EUR buyer it may well be a case of locking in some at current levels and placing market orders to the upside to try and take advantage of any spikes on an intraday basis. EUR seller? If you are achieving under 1.30 I would say in current markets that is a fair level to achieve. Please contact a member of the Aston team for a rate of exchange.
We don't have too much in the way of data this week although markets will be paying particular attention to the FOMC minutes on Wednesday and also the ECB on Thursday. I say we don't have too much out this week although as we observed last week, the markets got scared pretty quickly. That was with the Chinese off on holiday too! Expect fun and games again this week.
If you have any questions please do let me know.
Have a great week.
Written by Liam Alexander