The ‘Brexit’ story has dominated headlines recently and will continue to do so. With all the conversation about trade agreements, the Maastricht Treaty, how much does it cost the UK to be in the EU, credit rating implications, Chinese funding, the G20 meeting in Shanghai, lack of facts, televised debates? There is one crucial thing that all esteemed commentators have missed - Glastonbury takes places on June 23rd! Well, there goes 250,000 remain in the EU votes. The chance of those youthful rascals getting organised to register for a postal vote is about as likely as Michael Jackson headlining this year.
Since Boris Johnson joined the ‘Out’ campaign it has been one way traffic for Sterling against both the US Dollar and of course the Euro. Where do I think Sterling is going? I think we are going to see further weakness. Indeed, Cable (GBP/USD) traded at its lowest level since January 2009. I suggested at the start of 2016 that I thought we would test lows of 1.35/1.36 and I don’t see any reason to change my initial forecast. We may well hit those levels sooner rather than later. Do you need to purchase USD from Sterling? If so, I would look to do some on SPOT now rather than wait for it to fall further. Yes, the rate is horrendous although with all the political and economic uncertainty surrounding Sterling and the UK my suggestion is that we’re going to fall further. If we decide to leave the EU? Well, you can expect a 15-20% fall in the value of Sterling according to most analysts. Do I think that will happen? No. I think we’ll have parallels with the Scottish referendum where Sterling lost value against a basket of currencies and when the status quo remained we saw a sharp move higher.
If we look at the graph below on GBP/USD we can see the downside targets for Sterling against USD. We have a major support level at 1.3787 and once that breaks it opens the door to target 1.3501. At present, downside risks remain. Please contact a member of the Aston team to discuss a plan for your USD requirement.
USD seller? Same suggestion as the past two weeks. Convert a substantial amount of your dollar holdings back to Sterling on SPOT. If you think we are going to push lower consider transacting 50% on SPOT and then 50% on a market order basis at appropriate levels. Please contact myself or one of the trading team to implement a SPOT deal or place a market order.
On GBP/EUR I see a test of 1.25 the figure should we not see a move back to 1.30 the figure and a sustained break above that in the coming days. With the volatility surrounding Sterling I see further pressure to the downside on this pair. However, we mustn’t forget that a potential Brexit is not just a Sterling story; it affects the Eurozone too. I see a more gradual and balanced downtrend with some spikes on an intraday basis to the upside. Should the UK leave then that of course is a huge negative for the EU and may just be the beginning of the end of the EU project with contagion signalling the likely departure of further member states.
If we look at the graph below GBP/EUR has had a significant move to the downside although the momentum is starting to fade. I’m looking at 1.26 to the downside as showing support and should that give way then expect a test of 1.25 the figure. If you are EUR buyer from Sterling then place orders to the upside as we may see a break higher. I suggest placing orders to purchase Euro’s at 1.2750 and 1.28. Yes, we’re not at 1.42 any longer however on a historical basis, GBP/EUR is above ‘fair value’ levels. Please do speak with the team at Aston to discuss a plan over the coming months as we may see a move below 1.20 prior to June.
EUR seller back to GBP? Look to cover off a percentage of your exposure on a SPOT basis and then stagger market orders at 50 pip intervals to the downside. Please contact a member of the trading team to discuss.
On the data front this week we have numerous data releases that will increase the volatility of currencies. The main release will be the unemployment rate and Non-Farm payrolls out of the US on Friday. Another strong figure is expected so this should add further weight to USD that will likely push Sterling lower. Tomorrow we have the unemployment rate out of Germany and the ISM manufacturing figure out of the US. On Wednesday we have inflation data out of the Eurozone with Consumer inflation expectations out of the UK on Friday morning.
As I mentioned last week, volatility surrounding currencies is going to be extremely high this year. Please do have a plan in place to mitigate your currency risk whilst allowing yourself room for upside potential.
Any questions please do let me know.
Have a great week.
Written by Liam Alexander