Risk-off ahead of Theresa May speech, but GBP rebounds

The GBP rebounded somewhat from its Monday low and currently trades around 1.2120. This is despite a broad risk-off sentiment ahead of Theresa May's speech at 11:45am London time today: Gold and the JPY are up, equities and the USD are down from yesterday. Market participants expect May to announce that her government will favour a "hard" Brexit rather than a "half in, half out" agreement.

Cable is still trading close to its lows with negative momentum intact. GBP futures positions are still deep in negative territory but less extreme than in mid-2016, suggesting that the fall in the GBP might well continue. Hard Brexit + Trump = GBPUSD approaching parity? That seems extreme at the moment, but it's something I consider.

With this much uncertainty in the markets but no real story to play just yet I feel comfortable on the sidelines. Waiting for ECB on Thursday and, more importantly, to finally see some actions by Trump and his cabinet beginning early next week after his inauguration on Friday.

Open positions as of 17/01/2017 9:00am CET: Flat

Realized YTD return: +0.7% from 2 trades

GBP down as market braces itself for hard Brexit

I've lost conviction in my EURUSD long trade which I opened at 1.0646. I still think the pair has potential to go up to 1.07-.08 but there's no real momentum, so I'm looking for opportunities elsewhere. Closed trade at 1.0608 to realize 0.36% loss.

Sterling got pummeled during the Asian trading session as market participants are pricing in the possibility of a hard Brexit ahead of Theresa May's speech on Tuesday. I'm seeing a low of 1.1986 on BBG but with GBP short momentum still intact it wouldn't be surprising to see cable go for its "flash crash" low in the 1.1752-1.1841 range. (When it comes to flash crashes, data become somewhat unreliable. Depending on which data feed you're using and which brokers/banks are contributing prices to the feed, you will see different lows. Thin liquidity is another problem with quoted prices recorded during flash crash periods.)

Open positions as of 16/01/2017 9:00am CET: Flat

Realized YTD return: +0.7% from 2 trades

GBP event risk: Scottish referendum

EURGBP Intraday Chart 08/09/2014

The British pound came under pressure after the publication of the YouGov September poll results, which hinted at more people being in favour of Scottish independence than initially thought. In fact, the number of people saying "yes" to independence were in the majority for the first time with 51% of the votes. Although there clearly is an actual possibility of Scottish independence, the latest results should not be overstated. Polls have wrongly predicted voting outcomes in the past. People are naturally more inclined to vote against drastic regime changes, and saying "yes" in a non-committal poll is a different thing from doing so when it comes to actual voting altogether. We are convinced that the Scots will vote against independence in the referendum on 18 September.

Traders should still entertain the possibility of increasing volatility and GBP weakness as we get closer to the referendum. EURGBP is currently at 0.8014 and with GBP net positioning still long we see substantial downside risk for the British pound during the next two weeks. Those who would like to keep their GBP long trades open might want to hedge against this particular event risk, if their position is not outright speculative, or at least make sure to have a stop loss limit in place.

Our longer-term view remains EUR short and GBP long, so we will likely re-enter EURGBP shorts once uncertainty abates.

 

US dollar declines due to debt ceiling debacle

Expectedly, the US dollar softened on the final trading day of the week following an announcement by Treasury Secretary Jack Lew that the US government may run out of funds at some point in October if congress fails to close a deal on lifting the debt ceiling. A part of the American congress will be shut down on October 1, which is the latest date when a deal should be made in order to avoid excess volatility in the financial markets.

However, even if the US congress fails to lift the debt ceiling by then, crucial parts of it will continue work (it is only a partly shutdown), technically giving the country roughly two more weeks to find a solution. Investors should thus not buy into the fear-mongering in the financial press, even though caution is advised. Looking at the still relatively calm markets, especially compared to 2011 and the end of 2012, market participants seem to expect the US government to eventually come to an agreement before the deadline.

In addition to the budget talks, the increased uncertainty in the US stems from an ambiguous forward guidance policy of the Federal Reserve with respect to its tapering plans as well as an unfortunate search for a successor of Fed chairman Ben Bernanke.

The USD currently trades at $1.6134 against the GBP. The 0.6% gain of the British pound is not just due to the uncertainty in the United States but also because of an interview with Bank of England governor Mark Carney stating that there was little support for further quantitative easing (QE) in the UK. Cable is still about 1% below its rate from January 2013, but it has gained 6% over the past six months alone without any imminent signs of losing momentum.

The European common currency also appreciated relative to the dollar on a daily basis with EUR/USD currently trading at $1.3523. Looking at the performance over the last five trading days, this leaves the euro almost unchanged for the week. In the first half of the trading week, reports from Italy that members of the People of Freedom party were going to resign collectively if Silvio Berlusconi would be removed from the Senate caused the euro to decline. The losses have since been reversed against the dollar given the problems in the US. However, the situation in Italy still poses a serious problem, because the threat by Berlusconi's party members could well turn into a government crisis in the Southern European country. This is a risk for the European currency that may not be ignored, no matter how boring the troubles surrounding the "clown" Berlusconi may have become over the years.

Markets awaiting US employment data

GBP/USD has moved 40 pips up over the past 30 minutes or so, despite no real news in the market, and currently trades at $1.5365. Perhaps cable is anticipating weak US employment data. Initial jobless claims are due to be released in the United States in about four hours. According to a survey, the market expects new jobless claims of 365,000, and deviations from this number may well push cable and other US dollar crosses in either direction. EUR/USD also advanced, but not quite as abruptly as cable. It trades at $1.3089, roughly 0.15 percent above last night's rate. Also signalling a weaker dollar, USD/JPY declined from its ¥99.88 high to its current level of ¥99.58, once again failing to hit ¥100.

If the still ongoing moves of these three currency crosses were to serve as an indicator, I would say US employment data will again be disappointing. This would make it more likely that the Fed will continue its bond purchases at the current extent for at least another quarter. We'll know more in a few hours. Until then, beggars!

Currency investors who want to trade the JPY depreciation should perhaps do so using either GBP/JPY or EUR/JPY instead of USD/JPY in order to avoid direct exposure to today's US jobs data. GBP/JPY is currently at ¥153.07, only a few pips away from the new high set earlier today.