Good morning

What a day for a day dream….or not if you were the GBP FX trader. Only yesterday I wrote how we were likely to see GBPUSD trade in a range over this quiet festive period, only to see the GBP fall like a stone through the day. The GBP was hit over the uncertainties surrounding the EU referendum that is likely to happen over the coming year. The referendum is going to give (BoE) Gov. Carney some food for thought and potentially delay any rate hike, though you could argue that the BoE’s independence will and should give it the freedom to act independently of the EU referendum. To add to Carney’s woes, the low UK CPI levels and oil/commodity prices are not helping matters. With this backdrop in mind, my comments on the GBP dropping to the years low in April of 1.4565 is becoming stronger by the day. We know from previous comments from Carney that the basis for any UK rate hike are (1) increasing CPI and (2) wage growth. Neither are doing anything and as things stand that is unlikely to shift much. For this reason and this reason alone, the BoE will simply have to ride the storm and wait for market conditions to shift before considering a rate hike.

FX traders are still hesitating to “place their bets” on the USD for the moment. The main question on everyone’s lips remains the pace of US rate hike in 2016. More solid and continuous positive economic data is needed to give the FED policymakers the reason to hike. So for the coming weeks you are likely to see the USD (v EUR) range bound. On the 8th January we get NFP out the US and that number (which I expect to be solid) should support the FED’s decision to hike earlier this month and support further rate hikes over the coming year.

EM currencies remain shell shocked. India’s INR fell over 4% in Asia trading while China’s CNY was down a further 0.75%. Cast your mind back a couple months, I said categorically that the PBoC will “devalue” the CNY to help boost the economy. Granted they have not come out and said it, rather they have probably had a  quiet word with global banks and “told” them – let it go, let go. Oh, and have you heard or read anything from the FED regarding this recent weakness….erm no. What does that tell you…the US want and need a strong Chinese economy and therefore are standing back and letting the currency fall in the open market in the hope that it supports the economy over the medium to long term. You got to love international diplomacy.

Have a good day

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