Good morning,

Can pound stop sinking?

Sterling has managed to keep its head above water through Monday’s Asian session, only falling by around 30bps on the session. It is not a stretch to say that the outlook for sterling is very confused at the moment and that while economic data is stabilising thoughts that the UK economy is set to sink into the sea anytime soon, the political parlour games and uncertainty stemming from Westminster are front and centre of investor’ minds.

The moves through Friday morning had all the hallmarks of an algorithm taking an illiquid market into an air pocket. This illiquidity will likely continue.

For now however, there seems to be a bit of a pause and we may see a calm session or two bring some normality back to the cross; it’s as if the battle has paused and each side allows 2hrs to evacuate the wounded and dead before going back to the business of violence.

Few reasons to back GBP here

My expectations for a post-Brexit low of 1.10 in GBPEUR and 1.22 in GBPUSD for the year were hit on Friday and that naturally gives me pause to start revising them lower. I’d be surprised if we didn’t bounce in the coming days given how much panic and outright speculation is in the price although I think that there almost no reasons to buy the pound save the fact that it is ‘oversold’.

We raised the possibility of a ‘sterling crisis’ pre-Brexit vote; a crisis is defined as a fall of more than 15% in a year. GBP on a trade weighted basis is down 18% as of Friday night.

For now, issues such as interest rates, growth, what consumers are doing and other cyclical factors are being put aside as we focus on the deeper more structural issues such as the twin current and fiscal deficits and the relationship that the UK will eventually hold with the Single Market.

Confirmation bias and Clinton wins

The other ‘undefinable’ was also in action last night in another debate against Hillary Clinton. Following a pretty disastrous 48hrs of campaigning and polls showing an increasing run towards the Democratic candidate, Trump looked unable to meaningfully right the ship. Clinton did not hammer him too hard – there is good reason to not have him drop out and be replaced by someone more akin to the Republican Party’s natural base. All in all the debate was pretty dull – anyone looking for a line on Chinese yuan devaluation or trade was left disappointed – and we can expect with a little over 4 weeks to go, the negative barrages only increase as the candidates sprint for the line.

Mexican peso – a barometer of Trump risk second to none – was stronger overnight but, as we countenanced last time, there is little benefit in solidifying expectations from the results of a debate or of the subsequent moves in markets; elections are won at the polls not in the performance of the Mexican peso. CNN’s flash poll once again had Clinton as the overwhelming winner.

China back after a week off

The biggest loser overnight has been the Chinese yuan following the Golden Week break that saw Chinese markets closed. Chinese authorities have been more than happy to allow a slow depreciation of the yuan however large declines could trigger significant outflows. USDCNH looks like it wants to close above 6.70; a level that some see as a sign for further CNH losses.

It is Columbus Day in the United States and therefore we can expect an illiquid session through the afternoon.

Have a great day.

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