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April 2016

Sterling steadies in spite of Brexit campaign strengthening

Published: Monday 11 April 2016



 
  • Sterling steadies in spite of Brexit campaign strengthening
  • German Fin-Min blames ECB for right wing gains
  • Central Banks in the news this week
     
Wow, that was enlightening! We learned over the weekend that David Cameron inherited some money and paid some tax. For the press it was a case of the facts getting in the way of the whiff of sleaze and they are struggling to keep the agenda on track. Perhaps newspaper magnates should be forced to publish their tax affairs and then we can see which pot was calling the kettle black. I hope they are able to move on to important news, because there is enough of it to go around.
 
News like the fact that an unfancied horse and a first time jockey came through to win the Grand National and that an unfancied golfer like Danny Willett can hold his nerve and hole the shots to tough it out in Augusta. Both were remarkable successes. 
 
In the financial markets there is news too. News like the fact that German Finance Minister Wolfgang Schaeuble, is, in part, blaming ECB negative interest rate policies for the rise of the right wing parties in Germany. Like the growing belief that the 'out' campaign is gaining support in the UK EU membership referendum and like the fact that Chinese inflation may have stopped sliding after this morning's 2.3% announcement.
 
Sterling is holding its own after a tough few months and there is a significant support level for the Pound against the Euro right where we are at the moment, more of that below. Whilst Monday will be a quiet one, the week ahead holds UK inflation data and the Bank of England's interest rate meeting. As has been the case since March 2009, there is no likelihood of any change in the UK base rate but the words and the mood of the BOE Monetary Policy Committee will be closely monitored for and change of sentiment. At this stage, rate cuts are perhaps more likely than any rise but neither is expected this Thursday.
 
The Canadian central bank will also be in play this week although they will also most likely leave the base rate on hold.  And the US Federal Reserve will be fronting a heap of speakers this week and will publish their Beige Book on Wednesday. That's a regional look at the US economy and forms part of the next Open Market Committee meeting agenda, so it can be highly influential. 
 
Other than these, the markets are poised technically for significant movement. That is covered in more detail in the sections below. If the currency pair that most affects you is not mentioned here, please let me know and I will happily arrange something to assist.
 
Meanwhile, have a great week.
 

Interview

 
Michael had just passed all his accountancy exams and applied for his first job as a proper accountant. The company's MD asked various questions about him and his education, but then asked him, "What is three times seven?"
 
"Twenty-two," said Mike in an instant. After he left, he double-checked it on his calculator which he had stupidly left in the reception area and he quickly realised he wouldn't be getting a job offer. However, later that day, he got a call from the HR department offering the job.
 
"Wow," said Mike. "I am really happy. Thank you. To be honest I thought I had blown it when Mr Smith asked me a maths question. I know I got that wrong. So why did he choose me?" asked Mike.
 
 
"Yes that was unfortunate," Said the HR Manager, "but according to Mr Smith, of the 6 applicants he shortlisted, you were the closest."'


Today's Major Economic Releases

 
Market BST Data/Event Previous Expected
USD 13:30 US: Treasury Sec Lew speaks    
USD 14:30 FOMC Member Dudley speaks    
 

AUD

The decision by the Reserve Bank of Australia to leave their base rate on hold this week added strength to the Australian Dollar. The improvement in the value of oil and energy products added to that strength and the pressure that Sterling is feeling ahead of the EU exit vote pulled the Pound lower. The combined effect is that the Sterling – Australian Dollar rate has fallen from around A$2.05 at the start of the year to around A$1.85 as I write. As the 23rd June (the referendum date in the UK) appears to be a long long way away, Sterling is likely to remain vulnerable for further weakness. That is no surprise but there are support levels for the Pound that may offer some respite for those who need to sell sterling and buy the Australian Dollar. The half way point between the low of 2013 and the high of 2015 is A$1.8350 or thereabouts. That will be a target for many traders. Sterling could well bounce a little when that level is encountered, so don't be surprised and do be ready. If that level breaks though, there is scope for a tumble towards A$1.75. That's the 61.8% Fibonacci retracement level which traders will target as and when the Pound continues its decline. Anyone seeking to buy Aussie Dollars will shudder at the prospect but we shouldn't be too surprised if it happens. 


 

CAD

A small scale rebound in the wholesale price of oil and other energy products has given the Canadian Dollar a bit of a fillip. That, plus the pressure the Pound is under regarding the EU exit vote, is pushing the Sterling – Canadian Dollar rate downwards. It seems almost inevitable we will see this slide to C$1.81. That is the 50% retracement level between the 2013 low and the 2015 high. Those who need to buy Sterling against the CAD would do well to target that level or as near to it as you can get because we may well see a bounce from there. If we do, then C$1.87580 is probably the first target. However, if the Pound manages to slink below C$1.81, then we can expect further losses and C$1.73 beckons. This kind of headless-chicken trading will haunt the Pound until the 'Brexit' vote is out of the way and, if the UK votes to leave the EU, further Sterling weakness will follow – at least in the early weeks. Sorry to be the harbinger of doom but traders hate uncertainty and this is about as uncertain as it comes. 


 

EUR

To the east of the Channel, the European Central Bank is committing itself to doing whatever it takes to reinvigorate the EU economy and the Euro is weaker today than it was yesterday as a result. To the west, the impending EU exit vote is taking centre stage and the BOE is almost a side issue. The result is that the Pound is being ...well, pounded and the Euro is being flattered by the weakness that sterling is suffering. The €1.23 level is very important. It marks a 50% retracement of the 2008 low to the 2015 high. If Sterling can hold in here, and technically speaking this ought to provide a significant amount of support for the Pound, then we may well see a bounce but, if €1.23 gives way, the GBPEUR exchange rate is likely to drive down to €1.20. That is the trendline support that started back in 2009. This trendline has been tested on numerous occasions and has stopped the Pound from falling lower. With the Brexit vote a couple of months away, I wouldn't be surprised if that level broke; at least in the short term.


 

NZD

As far as the Sterling – NZ Dollar exchange rate goes, the NZ$2.05 level appears to be providing sufficient support for the Pound at the moment. That has certainly been the case for the last six weeks and this at a time when Sterling has been diving against most other currencies. If this level holds, then the bounce in this pair could see us back up to NZ$2.10 pretty quickly and maybe even NZ$2.16 in the medium term. The Reserve Bank of New Zealand is very concerned over the strong NZ Dollar and the impact it has on exports and they have been actively cutting their base rate; ostensibly to boost domestic growth but knowing that is also weakens the currency. However; with Sterling being so damaged by the impending EU referendum, it is hard to see Sterling making any headway against the NZD or to see the NZD fall too much when the base rate is still 2.25% and that is very attractive to investors who are getting virtually no yield anywhere else. 



USD

Fed Chair, Janet Yellen sees no bubble in the US economy but the US Dollar stubbornly refuses to weaken. The Sterling – US Dollar rate bounced in February but the UK EU exit vote is looming and the Pound has given up most of the gains as traders run scared. You can see the small upward trend that started in Feb but the more important level seems to be the psychological barrier of $1.4000. If Sterling can maintain itself above that level, we will see a bounce in this pair but if the fear of the Brexit vote overwhelms the Pound, we will be back at $1.38 before we know it and perhaps $1.35 within the next couple of months.  



 

Daily Currency Insight by David Johnson



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