Equity markets continue to make fresh highs, some of them anyway, as risk sentiment remains on a robust footing. It certainly didn’t hurt that the UK economy got some welcome news yesterday, with the unemployment rate falling to an 11 year low. Bear in mind though, that data is a lagging indicator and is reflective of conditions that existed before the referendum vote. Wage growth remains anaemic though, and it would be hard to believe that current circumstances are conducive to further acceleration, considering the IMF’s recent downgrade of UK growth prospects.

 

While sterling started yesterday under pressure, it managed to recover somewhat, and there is no confirmation yet that we are in the next phase of a downtrend. In fact this morning, both sterling and the euro are stronger versus the greenback. All we can do is keep watching and see if key levels get challenged. Indeed yesterday, sterling actually outperformed the euro, which traded in a very tight range versus the dollar, and this trend continues today. All in all, not a huge amount of excitement for the currency majors.

 

Today we get the ECB rate decision, and it’s quite likely that President Draghi will be forced to consider additional monetary stimulus following Brexit. Depending on what he announces this could inflict some damage on the euro. It’s worth noting though that even more quantitative easing poses a rather unique problem for the ECB. One of the guidelines for the national central banks regarding their sovereign debt purchases is a restriction against buying debt which yields less than -0.40% (yes the minus sign is appropriate), but in the case of Germany, where the Bundesbank has to buy the largest component of Eurozone debt, this restriction is becoming a problem, given the fall in yields after the EU referendum. What to do, what to do!

 

The IMF has been busy, and its work is one of gloom. According to the IMF, Nigeria’s economy is expected to show negative growth this year, and the naira has weakened in the wake of the announcement. The convergence between the official rate and the parallel market continues apace, and at the moment it seems to be the case that the official rate is doing most of the work.

 

 

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc; and at www.parityfx.com

It’s really starting to look like the next leg down in sterling is beginning. As I said in a recent blog, I’m loathe to call it until we make a new low. Elliotician’s (practitioners of Elliott Wave Theory) will know what I mean by this… it’s always difficult to differentiate between a ‘B’ wave and the start of a new impulse wave until you get reasonable clearance from the previous low. Not only is sterling weakening but the euro is as well, which is what I expected for the next leg down, don’t get me wrong, sterling is underperforming the euro at the moment, but it’s not looking good.

GBP/USD…

EUR/USD….

Why should this be happening now? Well… Prime Minister May has made a political calculation which is feeding market uncertainty. It’s either genius on her part, or a horrible mistake. The political calculation I’m making reference to is her decision to stall on pushing ahead with Article 50 which will trigger the exit of the United Kingdom from the European Union. I mentioned in a recent blog, that following discussions with Nicola Sturgeon, the Scottish First Minister, Prime Minister May has determined that Article 50 will only be triggered with some buy in from Scotland. I can well understand her desire to maintain the integrity of the United Kingdom, but the short term cost is uncertainty. I will never be able to say this often enough… MARKETS HATE UNCERTAINTY. This is what we’re experiencing right now, as businesses come to terms with a lack of clarity regarding the United Kingdom’s relationship with the European Union. What we’re seeing at the moment are stock markets trying to hold on to recent gains, but I have to say, European bourses in particular (not including the UK markets) do not look great. The recovery since Brexit was announced has seen some bourses around the world make new highs – particularly the FTSE 100 and S&P 500 – but not Continental European stock markets. The recovery we have seen for Continental markets have been distinctly corrective. If they turn, and turn hard, I suspect they’ll take global markets with them.

FTSE 100…

DAX…

Economists – the “experts” that the former UK Minister Gove dismissed, are increasingly pessimistic about the outlook in the UK, and consequentially the Eurozone. Investment is likely to take a big hit while the uncertainty persists, and there’s no reason to believe, given Prime Minister May’s decision that this state of affairs will change this year. Indeed the IMF has just cut 1% point of UK growth forecasts for 2017, and that’s not their worst case scenario! A former MPC member was on tv last night suggesting that the Bank of England should act decisively to add liquidity to the UK economy. If they get it wrong what’s the worst that could happen, higher growth and asset prices, but to get it wrong could lead to a significant fall in output. What does he think we have to fear? Falling business investment as long as uncertainty persists, falling house prices too (already reports are coming out showing sales of new London homes are at a 3 year low). Let me just add, if some of the doom sayers are right and house prices do fall, this could set off a feedback loop into consumption in the UK that will be hard to correct. In that scenario it is clear that the Bank of England will be forced into an aggressive programme of quantitative easing

 

You don’t have to be a genius to figure out what the implications for the currency markets are. If the Bank of England does nothing, or doesn’t respond quickly enough, we could see confidence and investment fall, leading to further significant declines in sterling, and I believe the euro will also be affected albeit to a lesser extent. If the Bank of England does act, then sterling will still fall. Quantitative easing tends to do that to currencies, but perhaps the euro will be less negatively impacted. Either way, this all looks very very bad for the pound. We might look back at GBP/USD trading at the 1.30 levels with some fondness in a few month’s time. This does not look good at all!

 

 

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc; and at www.parityfx.com

While consensus seems to be that UK equities will benefit from the Brexit induced fall in sterling, HSBC has stated that there could be a sharp reversal in to the end of the year with a forecast that UK equities will finish the year about 7% down from here. If global equities continue on with this powerful bull run, and bearing in mind that the FTSE 100 index is heavily populated with international stocks it’s hard to see how HSBC can be right on this. But it bears watching. One area where there seems to be agreement is the fact that UK equities should outperform European equities though.

 

Militants are becoming increasingly active in the Nigerian Delta region frustrating Nigerian attempts to maintain current production levels. The insurgents are a reflection of the anger felt in such a resource rich region where living conditions are fairly poor. I fear this is a state of affairs that is likely to continue unless a new settlement is reached to pacify the ethnic minorities in the Delta. Meanwhile the official naira rate continues to converge towards the parallel market rate. It is entirely possible that by the end of the year this process of convergence will be complete. We continue to believe that there’s a case for the parallel market to end the year much stronger than the current position.

 

The Chinese economy, at least according to the official data, appears to be chugging along with 6.7% GDP growth in the second quarter which is unchanged from the previous period. Government stimulus and a strong property market seem to be the main contributors.

 

I thought this was deliciously ironic so I couldn’t resist mentioning it, the US has now started to export gas to the Middle East. Yes, you’re not mis-reading, it’s actually happening! The Republican Presidential convention has started and Donald Trump is expected to set out his case later on in the week. This could be a key moment, as we will get to see if he can put forward an argument that can appeal to a wide enough section of the electorate. The convention has not been without drama though, with attempts by those opposed to him to disrupt the event. They weren’t successful, but this is a reminder that even within his own party there are those who are ardently opposed to him.

 

I’m not sure there’s much to say specifically about currencies today. After the frenetic trends of recent weeks, we appear to be in some sort of consolidation period. Sterling continues to be the focus, and this morning it has weakened a little bit, but still well within the range of recent days. We continue to believe that the case for more sterling weakness is the most compelling theme at the moment.

 

 

 

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc; and at www.parityfx.com

 

 

Sterling weakened into the close on Friday.

At this stage though, it would take a new low to convince me that that’s the end of the recovery. As I said in a previous blog, the odds do favour more sterling weakness, but perhaps it’s too soon for that. You have to factor in all the profit taking from traders who have been short gbp. Once they’ve booked their profits the way should be clear for more sterling weakness. Indeed Credit Suisse recently suggested that fair value after Brexit might be in the low 1.20s, when you consider that the threat of monetary stimulus from the Bank of England is still in the air, it’s hard to dispute their valuation. Furthermore, Andy Haldane, the Bank of England’s chief economist has suggested that he will support significant monetary stimulus in August. If that’s the case, then any pound sterling bounce from here is going to be of the limited variety. The new normal may well be a 1.20 handle for GBP/USD, but at the moment I’m still trying to process the implications of the recent discussions between Prime Minister May and Nicola Sturgeon the Scottish First Minister regarding Britain’s exit from the EU. It might be nothing, it might be something, watch this space.

 

 

 

 

 

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc; and at www.parityfx.com

The MPC met, and the Bank of England announced that they would maintain rates at 0.5%. As I suggested in yesterday’s post sterling was likely to strengthen in this scenario.

The FTSE also fell on the news, but to be honest it wasn’t a big deal in the scheme of things as the index didn’t lose much in percentage terms on the day.

For the life of me though I don’t understand why the media has described the outcome as a surprise. What am I missing here, looking at the economist forecasts, the predictions were for 3 votes to cut, and 6 to hold, in the event we got only one voter pushing for a cut and the rest elected to remain on hold. Yes that’s a slightly more hawkish stance than expected, but listening to the BBC and reading the FT, you could be led to believe that a cut was actually expected. Hmmmm… I confess I haven’t looked at the front-end of the fixed income market, perhaps that’s where the answer is to be found.

 

There continues to be negative commentary regarding the fate of the UK economy, with Larry Fink, the CEO of BlackRock warning of a Brexit induced recession, with as much as 2% taken off UK GDP. I would love to argue against this, but the lead up to the EU referendum unquestionably affected business sentiment and activity. Even now, it’s hard to say that key decisions are being made as many investors and businesses wait to get a clearer picture of how the UK manages its exit from the European Union. There are key points that need to be clarified, not least, are some businesses going to move operations from the UK? What will happen to house prices? How much of the Eurobond business will the City of London retain? Clearly it’s best to characterise the MPC’s decision today as changeable, if the data is as bad as the doomsayers say a cut is still likely. This means that there really is no reason to expect a substantial rally in the pound from here. It’s possible that news over the coming days might be sterling positive, but eventually it’s all about the economy, and the prospects are gloomy. On that basis, we still expect the pound to continue its depreciation trend. This time it would probably make sense for the euro to weaken as well, albeit much less so than the pound. Expect the dollar to be the winner in this zero sum game.

 

Prime Minister May’s ministerial appointments continue to be announced. Not much to say about most of it for now. But… Boris Johnson as Foreign Secretary? This is either a stroke of genius or folly. I’m leaning towards genius myself, but for those who haven’t seen this, have a look at the reaction of one of the leading Labour politicians, this is not an atypical reaction in the UK. I think it’s genius because he is actually an extremely intelligent man who can be very charming and charismatic. He’s got a lot of work to do, given the insulting rhetoric he employed during the referendum campaign. It’s genius because he is clearly no friend of the new Prime Minister, but he’s too big a beast to ignore. As the Don said in ‘Godfathers’ keep your friends close, but your enemies closer. I believe President Obama employed the same tactic when he chose Hillary Clinton as his Secretary of State. Time will tell. Boris seems to have been right about one thing, word is discussions are already under way between US and UK trade officials. Perhaps they didn’t lie about everything after all.

 

 

 

 

 

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc; and at www.parityfx.com

 

Today the MPC meets at the Bank of England to determine whether interest rates need to be changed. You’ll recall in the aftermath of Brexit, Governor Carney suggested that rates might have to be cut. The question, following the appointment of Theresa May as the new Prime Minister is considerably different from the scenario everyone thought would arise. At the time, it seemed likely then that there would several weeks of campaigning before the new Prime Minister was selected, but events have moved much more quickly. So the question is.. does this change things? After all there is considerably less uncertainty in the market now than there was before, and in fact sterling has been rallying, although it had a somewhat weaker close yesterday. There are other factors of course, not least the prediction that the UK is likely to enter a recession in the coming months following the significant drop in business forward investments caused by Brexit. Indeed, economists also expect the Eurozone economy to be negatively impacted in the coming months as well. In any case, the forecast from those same economists is for only a small number of MPC voters to advocate a cut, so in all likelihood we’ll get no movement in rates, but a very cautious statement about the outlook for the UK. That in itself will be enough to impact sterling, so the thing to look for is how dovish will the MPC be relative to expectations. We’ll know later on today. In front of that, I don’t expect traders to take big positions because it really is on a knife edge. I don’t have much to say about the new ministerial appointments, we’ll need to see what they say and do over the coming days and weeks to form any opinions on changes in UK policy.

Elsewhere risk sentiment continues to look very positive. OPEC is becoming more positive on the oil outlook, despite an overhang in inventories. They’re predicting $60 up until 2018. Good luck with that.

 

A brief mention regarding Japan, and Prime Minister Abe’s victory, last Sunday, in the Upper House elections. He now has the mandate to push ahead with discarding pacifism from the Japanese constitution. There are huge geopolitical implications with this, not least Japan’s tense relationship with China, but on a higher level the interaction between China and the West is likely to be the most significant foreign policy issue of the 21^st century. This is something to monitor in the years ahead. First the Japanese Prime Minister will push ahead with a fiscal stimulus for the perpetually ailing Japanese economy. Quite how this is possible with an already massive government deficit, I’ll leave to those with more imagination than me!

 

Finally, the polls seem to be turning in Donald Trump’s favour. I’m reminded of an observation in the great tv series ‘The West Wing’… “Republican’s always poll better than Democrats when the focus is on security issues”. After the Dallas shootings perhaps we shouldn’t be surprised. A long way to go yet, but it certainly doesn’t seem as if we should anticipate a straightforward coronation of President Hillary Clinton. Brexit should have taught us all that by now…

 

 

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc; and at www.parityfx.com

Rather quietly the S&P 500 has exceeded last year’s record high and looks set to power on to greater highs. This fits in rather well with my bigger picture Elliott Wave count for the bull trend that began all the way back in March 2009.

If my count is correct then we have quite some way to go before we need to worry. Obviously I wouldn’t be pointing this out if it didn’t have implications for the currency markets. As things stand it is clear that risk sentiment, while taking a very temporary hit from the Brexit vote, has recovered nicely, and looks sent to continue in positive fashion. Even more pertinent is the fact that policy makers are likely to be taking note of the market action and consumers will be buoyed by the positive wealth effects of the rally. Based on this, and the stabilising political situation in the United Kingdom, it is likely that in the coming months the Federal Reserve will again place monetary tightening firmly back on the agenda. If this is indeed the case then, we can expect the dollar to strengthen as the market starts to slowly price in an increasing probability of higher US interest rates. I wouldn’t be surprised to see stronger consumer spending on the back of the equities rally, and I should also add that it’s noteworthy that the rally kicked off on the back of the strong jobs data last Friday. That doesn’t feel like a market that’s afraid of higher interest rates to me.

 

Sterling continues to perform strongly following the resolution of the Conservative Party’s leadership contest, rallying almost 4% from the lows now. If that’s not enough there are signs that international investors are starting to look at opportunities to buy British assets on the cheap in the wake of sterling’s collapse. This is a sure sign that some now consider the pound sterling to be undervalued. A large US fund is rumoured to have had exploratory talks with the commercial property funds which were forced to reject demands by investors to get their cash back; and a South African retailer is looking at a takeover of Poundland a high-street discount store. As I mentioned in yesterday’s blog, there is an increasing risk of a fairly sharp rally in sterling, particularly if the MPC decides, on Thursday, that interest rate cuts are no longer on the table. But it’s important to note that as things stand, economists expect 3 of the 9 MPC voters to recommend a cut, this is in comparison to the situation in the last few meetings where voters have unanimously voted to maintain the status quo. Normality can return quickly after a crisis sometimes!

 

 

 

 

 

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc; and at www.parityfx.com

 

It seems we should never under-estimate the capacity of the Conservative Party to make pragmatic decisions where their survival is concerned. Andrea Leadsom the lesser contender in the internal party election to select a new leader gracefully bowed out, recognising unlike the Labour Party that if, as a leader, you only command the support of a small percentage of your fellow MP’s how can your position possibly be tenable. I can only applaud her mature decision, and the markets did the same with a recovery in the pound sterling that continues this morning.

This is where it gets interesting. Mark Carney, the Bank of England governor, has been widely expected to cut rates at this Thursday’s MPC in response to the crippling uncertainty that’s been weighing on the pound. Does the quick resolution to the Tory party’s leadership question change things? I think it could. So what happens if he says that he’s going to take a wait and see approach? How will the markets react? The UK equity markets might not like it, nor indeed the gilts market, but if sterling has been sold on the basis that more monetary loosening is coming we might see a sharp jump in the pound. After all, as I pointed out in yesterday’s blog, under normal circumstances the pound sterling looks oversold. I’m not saying for certain, but there is definitely a risk of a bit of a nasty short squeeze if Governor Carney disappoints. Watch this space.

 

Last Friday we saw a very impressive bounce in labour market growth in the US after a few months of rather disappointing numbers. The consensus had been for 175,000 new jobs created, in fact there were 287,000 compared to 11,000 for the month of May. Interestingly the unemployment rate actually rose from 4.7% to 4.9%, but the U6 number – a broader unemployment number – fell from 9.7% to 9.6%. Perhaps the prior slowdown was a blip, but it will take a few more months of data to classify it as such. For now, this is a welcome data point for the market and policy makers to mull over. Will this have an impact on the Fed? Possibly, particularly when you also consider this chart from Business Insider..

Wage growth seems to be picking up. I don’t think this means the Federal Reserve will hike yet, there’s far too much Brexit noise around, but once that fizzles out, then tightening will very likely be back on the agenda in the United States. Bottom line, don’t get too bearish on dollars any time soon.

 

Elsewhere, in Nigeria, the central bank had warned that a new current account maintenance fee would be applied, and they were true to their word. Henceforth there will be a 1 naira fee for every 1,000 naira transfer between accounts. Let me put this in more comprehensible terms, if you have to transfer N10 million (~$28,500) you will be charged N10,000 (~$28.50). That’s 0.1% charge. It might not seem like a lot, but that is a huge amount of transactional friction. I appreciate that Nigeria is experiencing rather severe fiscal challenges with lower oil prices, but surely a tax that is likely to impact economic activity, or at the very least move money out of the formal banking system is a retrograde step. It really seems a case of one step forward and two steps back at the moment. We will have to keep an eye on the economic impact of this policy on the Nigerian economy, but clearly it can’t be for the good.

 

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc; and at www.parityfx.com

 

We have seen a substantial decline in the pound sterling versus almost every other currency since the Brexit vote.

 

First we saw the collapse in the immediate aftermath of the vote, as the market was caught completely offside. As we all know, the final polls indicated that the ‘Remain’ camp would just sneak a win, but that wasn’t to be, and panic was the dominant theme in the market.

 

After the initial fall which continued on for another day or so, the market attempted to recover, but the selling pressure has been persistent. Clearly we all need to re-assess the prospects for the UK economy in light of this historic decision, but is that what’s driving the market now? Watching the rather toxic politics affecting the major parties in the UK, I am coming to the conclusion that the market is still terrified of the unknown.

 

In this case the unknown is whether Article 50, which initiates the process for an exit from the EU will be triggered or not. In theory, at least, this is not a certainty as the referendum is not by itself binding, only advisory. But it’s hard to believe any political party, not least the Conservative Party (with its history of Euroscepticism) would dare to go against the expressed will of the electorate. It seems to me that we are likely to continue to experience uncertainty until a new leader of the Tory party has been selected, and their strategy for dealing with the aftermath of the referendum is known.

 

As things stand that new leader should be Theresa May, the current Home Secretary, but we’ve been here before haven’t we? And I’m not even referencing the Brexit vote. Last year, after Ed Milliband’s failure to win the general election for the Labour Party, he stood down and left the way open for a new leader. No one expected Jeremy Corbyn to be the winner, but here we are. In opposition to the Labour Members of Parliament’s wishes, the wider party members voted for as left wing a candidate as could be found. Now, with a choice of the known and experienced Theresa May, who voted to remain, and Andrea Leadsom, a woman with very little front bench experience, who voted to leave. It is entirely possible that the rank and file of the Tory party might do a “Labour”, voting with their hearts and not their heads. This is exactly the sort of choice that could end up costing the Tories big. Yes the UK, has a parliamentary democracy and therefore the Tories would not be obliged to hold a general election, but it is questionable how much of a mandate a Leadsom premiership would have. Such a choice carries with it a substantial risk that the Conservative Party could be seen to have lost its electoral mandate only a year after winning power. It is entirely possible that, despite this risk, a calculation is made by the rank and file that the Labour Party is in such disarray that it doesn’t matter. They might be right. But calculations like this don’t exist in isolation and could well end up being the catalyst that sees the Labour Party get its act together and a more electorally palatable candidate like a David Milliband could be sitting across the floor in the House of Parliament in no time at all. The Tories would be wise to consider this.

 

So what does this all mean for the currency markets? As of right now, this move, when you look at GBP/USD (see below) or EUR/GBP looks stretched.

But I hesitate to say this is the end of it. We often see, during the most powerful trends, currencies persisting in extreme oversold paradigms for longer than one would normally expect. There is absolutely no reason to think this is not one of those times. I am therefore very cautious of viewing the market on a purely technical basis, the fundamentals (and in this case that means the politics) must be a guide. Until we have more clarity on the leadership of at least the governing party in the UK, it is too tough to say anything other than we believe the pound will continue to trade poorly. Bear in mind that after Carney’s post-Brexit speech he indicated that rates were likely to come down this summer. Later this week we get the MPC, and markets are pricing in a 75% probability that we’ll see a cut. Even if sterling is due a bounce, it’s likely to only occur after the decision…

 

Lest we forget the rest of the world there’s much more to discuss in coming blogs, not least the stunning turnaround in labour market data in the United States and a sort of Tobin tax on steroids in Nigeria. Watch this space

 

 

 

 

 

 

 

 

 

 

 

 

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc; and at www.parityfx.com

	High	Low			High	Low
EUR/USD	1.1107	1.1073		USD/ZAR	14.82	14.68
GBP/USD	1.3000	1.2874		GBP/ZAR	19.17	18.95
EUR/GBP	0.8615	0.8535		USD/ILS	3.8904	3.8687
GBP/EUR	1.1716	1.1608		S&P 500	2102	2095
USD/JPY	101.41	100.62		Oil (Brent)	49.48	48.65
GBP/AUD	1.7313	1.7136		Gold	1371.0	1362.0
				USD/NGN yesterday’s close		350
Please get in touch with us if you need the latest USD/NGN price

The FED released their minutes from their JUNE meeting and surprise surprise the rhetoric made it pretty clear that the delay to a US rate hike was the result of the upcoming UK referendum and uncertainty surrounding the result. The FED noted that the UK’s referendum was making it difficult for the FED to raise rates in spite of their expectation of a rise in inflation over the coming months. The members noted that rate hikes are still data dependent and especially made reference to the labour market following the recent disappointing NFP numbers (June +38k). With the elections due in November I think the FED will in all likelihood hold off hiking until December at the earliest regardless of any respectful change in NFP. I say that because rate changes could affect (in some way) the way people vote and while the FED is independent of the White House, they would prefer to tread carefully so as not to upset the applecart. No doubt the FED members will be keeping close tabs on tomorrow’s NFP (expected +175K). One could argue that the expectations as we saw in June could be vastly different (June expected +164K and printed +38K).

With regard to the UK referendum (remember the meeting was held pre 23^rd June) the minutes noted “considerable uncertainty about the outcome of the vote and its potential economic and financial market consequences.” Additionally the members noted they “would closely monitor developments associated with the referendum as well as other global economic and financial developments that could affect the U.S. outlook.” Suffice to say the FED were concerned about the spill over effects in the event the UK vote LEAVE…so with that now confirmed the FED are probably steaming up and down the corridors scratching their heads and wondering why this happened. Already the USD has seen a move that could see EURUSD head for PARITY by year end and this will add pressure to the US economy given the strong USD and the effects on corporates exporting abroad. Certainly NOT the result they wanted (or expected) and as I wrote yesterday their words were by no means scaremongering…they were facts and true to life concerns. Agh!!! If only people listened.

As for our beleaguered GBP. Down in the dumps. I read a story this morning that people planning their vacations are opting for “All Inclusive” deals because of the extra costs associated with their holidays. GOOD I HOPE THEY STAY HOME. Yesterday was another terrible day for the GBP falling to 1.2795 at one stage before recovering this morning to trade at 1.2950….not that that recovery is likely to last as pressure is already mounting and the GBPUSD is trading heavily. The market is definitely SHORT GBP overall and I expect further deterioration in the GBP until we see “a player” (be it a CB, BIS, funds) start to hoover up the GBP and sending all the shorts to cover their positions. The overall sentiment remains the same. Until we hear some rhetoric from the new PM (Ms May we hope) as to how the UK will deal with the EU (and others) and whether Article 50 will be declared, let’s assume things will remain volatile and uncertain. Honestly with Gove (the backstabber) and Johnson (the mouse) and Farage (Pinocchio) I would RELISH and jump for joy if May said to hell with it, now the cats out the bag lets have ANOTHER referendum and see what happens. I suspect people would vote somewhat differently now they know the lies that were fed to us. AGH!!!!

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.

Follow our tweets @parityfxplc

Follow us on LinkedIn ParityFX Plc; and at www.parityfx.com