20150724 – GBP OVER-OWNED?

High Low High Low
EUR/USD 1.0996 1.0963 USD/ZAR 12.5410 12.4275
GBP/USD 1.5525 1.5500 GBP/ZAR 19.46 19.24
EUR/GBP 0.7090 0.7068 USD/RUB 58.88 57.38
USD/JPY 124.06 123.53 USD/ILS 3.8393 3.8051
GBP/CHF 1.4916 1.4856 S&P 500 2,109 2,102
GBP/AUD 2.1330 2.1075 Oil (Brent) 55.71 55.30

The currency markets have been tough over the last month or two, and speaking to some of my colleagues who are experienced traders it is clear that it has been a challenge for even the best to manage the ups and downs of the random walk unscathed. Yesterday retail sales data was released in the UK and it was singularly disappointing, core retail sales rose 4.2% year on year, which on the face of it is impressive, but it was down on the reading of the previous month, and some distance worse than the economist forecasts of 5%. What was particularly useful however was to observe the reaction of the currency market.  The pound sterling fell heavily against its main trading pairs with GBP/USD down about 1% since the data came out, and EUR/GBP up roughly the same. This was clearly a GBP move and we can surmise from the price action that this currency is relatively over owned at the moment – the market has taken Governor Carney’s hawkish comments at face value and run with it. Clearly market participants were not anticipating soft retail sales data, and they were duly punished by the negative surprise.

 

As expected South Africa raised rates by 25bps yesterday. This despite weak growth, but the central bank governor stuck with his mandate, acknowledging that failure to adjust monetary policy now might result in inflationary pressure later. The rand has not been a stalwart currency for some time, and aside from a brief reaction in support of the move, it continues to weaken, in my view, in response to the likelihood of rate rises in the United States, and the general weakness of the commodity complex. As I have mentioned in recent days, this is to be expected. The same could be said for the Russian rouble which is as weak as it’s been since the end of Q1, and looks set to continue depreciating. These are tough times for the commodity complex and associated currencies.

 

Lest anyone consider the travails of the commodity complex to be a uniquely developing market paradigm, you need only cast your eyes towards Australia and New Zealand. Both currencies are under pressure, and you have to go back as far as the global financial crisis to find a time where AUD/USD has been as weak. When you consider that back in 2012 this currency pair was trading comfortably above parity at 1.10, it has fallen some ways to trade currently below 0.73!! So clearly this doesn’t just happen to emerging market currencies. The fundamentals that support all currencies will have their day, make no mistake.

 

In what I personally consider to be a backward step, the Indian government is introducing legislation to curb the independence of their central bank, RBI. The plan is to alter the rate setting committee, with 4 government appointees and 3 RBI appointees. Such a great pity, the Indian central bank governor is widely perceived to be one of the truly smart ones in office today. Quite why this should make sense given historic precedence escapes me. But this could result in a weaker fight against the predations of inflation in future. In a country with a huge population of poor citizens there are likely to be adverse consequences, and it doesn’t bode well for the evolution of politics in the world’s largest democracy. It will be interesting to see what this does to the Modi premium. Perhaps he won’t be afforded the benefit of the doubt so freely in future. If this goes thru, I fear it doesn’t bode well for the longer term prospects for the Indian rupee, but perhaps I am reading too much into this. Only time will tell.

 

We are now entering what should be the final lap in the Greek crisis. Legislation has been passed, as demanded by creditors, and now the Greeks are back at the table with creditors to finalise the €86bn rescue package. Negotiations are expected to take a few weeks, and all must be mindful of the August 20th deadline for a large repayment to the ECB. Failure to reach an agreement, will add volatility to the market the closer we get to the deadline. There are never certainties in these negotiations as recent history makes abundantly clear. The hope is to get an agreement that Eurozone finance ministers can sign off on in a few weeks. Fingers crossed!

 

 

 

 

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