Good morning,
The pounded pound
The last time sterling performed against the dollar as badly as it did yesterday we were right in the teeth of the Global Financial Crisis. Bank shares were tumbling, Bank of England Monetary Policy Committee members were voting for 1% cuts in interest rates and unemployment had just hit 2m people.
Yesterday however was a lesson in market sentiment. As we said yesterday morning, Boris Johnson is not worth this kind of sell-off in the pound but we are in a market that was already negative sterling, and has been for a couple of months or so. This negativity comes back to our poor inflation outlook, the lack of a wage driven recovery and imbalanced growth. Throw in an increased chance of a Brexit courtesy of Boris’s backing and sterling weakness was an open goal yesterday. The mantra of childhood football coaches will have been ringing in traders and investors’ ears; “you have got to take your tap-ins”.
So where do we go from here?
It is our belief that a lot of the recent sterling negativity, especially yesterday’s moves, are purely driven by Brexit fears. It therefore stands to reason that should we wake up in a little over 4 months’ time from now and the UK has voted to remain as part of the EU then this discount on GBP should be lifted in rather short order. That lifting of uncertainty is only going to take place once votes have been cast and in the meantime, as we have warned many times, there is still downside in all GBP crosses anticipated. They may not have the strength and severity of yesterday’s move but we cannot forecast away additional sterling weakness to fresh multi-year lows.
From an economic standpoint we must also ask when is the uncertainty of the referendum and markets’ movements in relation to the vote going to impact business confidence, investment, unemployment etc? The PMI surveys from UK industry due in the first few days of March are likely to be the first place to see any strains.
Bank of England Governor Mark Carney as well as MPC Members Shafik, Vlieghe and Weale will likely be asked as much in their testimony to the Treasury Select Committee at 10am today.
European PMIs signal ECB has more to do
While politics may trump fundamentals and the collapse of a currency is always going to get headlines there were some worrying numbers from the Eurozone economy yesterday. Eurozone advance PMIs from the continent as well as individually from France and Germany suggested that manufacturing will acts as a drag on Q1 growth. Exports were lower, a symptom of a stronger euro and a weaker Chinese yuan, whilst output costs fell the most in a year; additional deflation pressure for Eurozone policymakers to deal with.
The jury is still out on what the European Central Bank will decide to plump for when policy is announced on March 10th but an aggressive response is warranted we feel.
Japan on the grind
The Japanese yen has continued its strengthening grind overnight with USDJPY plumbing new depths. Comments from Bank of Japan Governor Kuroda in parliament yesterday gave markets a feeling that some of the optimism that his instituition had felt about hitting its inflation targets is drifting away despite the recent imposition of negative interest rates. There is no reason to think at the moment that we do not see prices below 110.00 sooner rather than later.
The Day Ahead
German IFO business climate will be closely watched to see if it backs up the negativity seen in yesterday’s Advance PMI measures whilst dollar bulls will be hoping that US consumer confidence apes recently improved data and keeps the greenback large and in charge.
Have a great day.
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