Currently viewing the tag: "GBP"
View: Economic weakness more of a risk for GBP than Gilts, like duration
The timing of Nigel Lawson’s observation that George Osborne should relinquish his role as chief Conservative chief party strategist to focus on the more important role of Chancellor has proved to be rather well timed with this morning’s first look at Q2 GDP showing the UK economy shrank at a dire -0.7% q/q rate, well below the median forecast of -0.3% q/q, leaving y/y growth at -0.8%. Ouch. The market was quick to seize on the positives, citing the Jubilee effect which most seem to think knocked 0.5% of the quarterly growth reading not to mention the rain which lasted a lot longer than that extended weekend. But this doesn’t alter the fact that the reading missed the median guess (who knew about the bank holiday and might have also looked out of the window at some point in Q2) by a significant margin and leaves us with three consecutive quarters of contraction in this double dip.
Full report below…
View: EUR/GBP shorts working well, EUR/USD ‘consolidation’ comes with downside bias
As confirmed by this morning’s PMI releases things in the Eurozone are a mess. Not only did the headline manufacturing number for the region as a whole disappoint at 45.9 vs. the 46.0 flash estimate released last week but the Spanish (43.5) and Italy (43.8) figures reinforced the notion that these economies are still weakening at a rate of knots. It’s no surprise to see the EUR react negatively to these series, yesterday’s US ISM manufacturing release having already begun to create some momentum behind the dollar. This is rather helpful to our FX ideas, expressed via shorts in both EUR/USD, our 1.3280 stop surviving pressure earlier in the week (for clarity all our stops are daily closes unless otherwise specified, for example hard stop would be intra-day), and short EUR/GBP view.
Full report below…
View: EUR/GBP break has room to run, stay short sub 0.8275
It seems the raft of improved data emanating out of the UK in recent weeks is finally having an impact on the MPC, the minutes for the April 4/5th meeting showing a surprise volte face by über dove Adam Posen, who moved back with the majority in calling for the asset purchase programme to remain unchanged this month. This left David Miles as the sole dissenter in calling for another £25bn increase from the current £325bn, although even he conceded things were finely balanced. Of course there is that additional factor of inflation with the latest rise in energy costs in particular making the descent from last year’s peak rather more sluggish than expected, and the budget is expected to add a further 0.1% to CPI from April. Nonetheless there does seem to be more tolerance of the downside economic risks present, recent turbulence in the Eurozone withstanding.
Full report below…
View: Break of DXY support significant, EM crosses look the most constructive option now
The break up in the dollar we saw during September looked a positive development for the greenback, but the pronounced failure of the key support area at 75.75/76.00 on Thursday was significant from a technical perspective and rules out any test higher in the immediate future. Indeed, the natural instinct of the market now should be to take the index to test down towards the 73.50 area which proved such solid support throughout June, July and August.
With bulls gaining confidence more widely, lured by hopes of a Santa rally, the obvious whipping boy is the USD. The Fed as ever remains firmly attached to dovish rhetoric, even if the widely anticipated ‘twist’ has only limited real impact, which will keep interest rate differentials blowing in a hostile direction – at least until the ECB cuts rates. It is also probably too early to become attached to the cyclical story with the downside risks to US growth substantial enough to offset what remains a dire picture for Europe (we’d stress the recent breakthrough on the debt crisis had nothing at all to do with fostering growth, if anything austerity focused policies in club Med and elsewhere have become even more closely linked to the support mechanism of the EFSF). This backdrop will probably be viewed as a success by the Fed, a weak dollar perceived to be one of the indicators that are supportive of recovery, alongside higher equity valuations. Bernanke has said as much.
In a world of ‘the least bad currency is king’ we’re left looking for more viable substitutes to be long. Despite the debt crisis solution in Europe we still find it difficult to come up with a constructive reason to buy the EUR and our gut still tells us to use rallies as an opportunity to sell, although we’d prefer to wait for a confirming technical sell from our indicators. GBP is being dragged along on the euro’s coat tails for the time being but we think this rally is poised to turn and would look to the first instalment of Q3 GDP due on November 1st as a potential trigger. There were plenty of disruptions in Q2 but any rebound is likely to be tepid. Median estimates see q/q growth at 0.3% and only one respondent in the Bloomberg survey is calling for a negative print. On a y/y basis the trend will slow further. Consumer confidence remains depressed thanks to a weak labour market and rising inflation, fiscal policy is also biting so the outlook for the fourth quarter is hardly inspiring too.
As we noted in our report yesterday though (http://wp.me/p1G1Fr-hk) the best opportunities in the FX arena appear to lie elsewhere, we like short USD/MXN for the time being while EUR/PLN and USD/ZAR also offer opportunities to bet on improved risk appetite lasting. The big macro bet of Asia currency appreciation took a big knock during the recent panic phase but the fundamental arguments for this remain solid too and the regional JPY crosses might also be a nice way of positioning for any BoJ intervention for an added kicker.
View: GBP/USD should struggle beyond 1.6100/40, watch for signs of a reversal
Sterling’s climb from the lows sub GBP/USD1.5300 touched at the start of the month has been quite impressive, the unit holding just under the 1.6000 level currently. Unfortunately this hasn’t been due to any particularly positive UK developments, rather the recovery has been on the coattails of a resurgent euro as investors piled in behind the view that policy makers there finally ‘get it’ and a credible solution was now in the works there. Of course such a scenario is essential for the UK too given that around half the country’s exports head for the single currency zone, but not enough in our view to warrant any substantial re-rating of the pound.
Examining UK dynamics more closely things are looking increasingly tough. Inflation hit 5.2% y/y in September (mkt 4.9%) and although nasty base effects were partly to blame it’s difficult to deny that there is a problem, underlined by rising inflation expectations, even if the headline rate does finally begin to moderate. This might normally be expected to help erode debt, but wage growth is paltry with the fall in living standards well documented and the unemployment rate is rising again, something not lost on the consumer with both the Nationwide (Sep reading 45.0 from 49.0 in Aug) and GfK (-30 vs. -31 in Aug) confidence survey’s stuck in the doldrums. It’s not just consumers though; the PMI’s showed manufacturing slipping into contraction over the summer while construction also continues to weaken. Only services have shown any resilience and the sustainability of that is questionable given income pressures and tightening fiscal policy. This should all be evident next week in the advance Q3 GDP print. Although NIESR estimates 0.4-0.5% growth recent performance and shocks over the summer (weather included) suggest this is optimistic.
Bank of England moves are equally telling, the additional dose of QE (increasing the programme from £200bn to £275bn) accompanied by cautious rhetoric as to the economic outlook, beyond here there have been calls for the government to show flexibility with regard to its fiscal consolidation. This was dismissed out of hand. It is after all the lone source of credibility left in the eyes of the market, even if the pledged budget targets look fantasy with the economy teetering. One metric worth keeping an eye on is the performance of gilts vs. bunds. While German paper outperformed amid flight to quality demand as the debt crisis flared, Deutschland’s credit worthiness is increasingly being called into question based on the assumption that they will have to bear a disproportionate cost of expanded bailouts. If we see UK yields begin to underperform vs. the German curve digesting this risk it might be an ominous sign. For reference 10-year spreads between the two sovereigns are currently +42bps from closer to 60bps at the start of the month.
The currency looks equally exposed, particularly given that economic performance may force the BoE to inject even larger quantities of cash into the economy via its inefficient QE channel. This should weigh on sterling, pressure that would become even more intense if markets begin to question the viability of the fiscal project too. The EUR/GBP chart still looks an uninspiring way to play this; however looking at cable we think the market will struggle to make much headway higher, the GBP/USD1.6100/40 area as really the very top of the recovery rally. Medium-term we continue to believe that GBP/USD should be able to push down through the September lows sub 1.5270 and would keep a close eye on indicators such as the MACD for sell signals. Even those with a more constructive view would be better served by patience, being room for even a short-term correction to tag back to the 1.5785 area if initial daily support at 1.5920/40 fails.
Related articles
- Mervyn King defends QE programme (independent.co.uk)
- Citi On Whether Europe Can Ruin The World; Or How To Use An Insolvent Continent As An Excuse For Global Printing (zerohedge.com)
View: Cable has further to fall, 1.5360 support should be tested
Much has been made of the UK government’s admirable programme of fiscal consolidation, creating something of a first mover advantage for the gilt market in particular – yields performing far more closely to bunds over the past eighteen months than to those markets where Britain shares closer fiscal dynamics, i.e that border the Med. Even ‘core Europe’ France has found itself under fire in the market – banking problems and ratings downgrade rumours abounding – to which it has responded with a more vigorous fiscal programme.
We’ve been a little more sceptical in Chancellor Osborne’s wonder package however (see our story from Aug 11th UK safe haven status ignores lurking macro problems, http://wp.me/p1G1Fr-91), believing that while the UK may have won some breathing space, shielding it from any peripheral contagion, the assumptions that formed the basis of the plan were just as flawed as any Greek fiscal projection. The crux of the problem remains growth assumptions with nearly half the budget tightening outlined coming about through higher tax revenues from a larger economy. Growth has disappointed consistently since the final quarter of 2010 blowing a hole in this argument, and over the course of the summer looks to have deteriorated even further. The Bank of England minutes from the September 8th meeting serves to highlight the scale of the problem, suggesting that if the recent run of weak data persists there would be a stronger case for a further round of quantitative easing (market looking for another £50bn on top of the £200bn already deployed). The market has begun to price this in as done.
Newswires focus may still be elsewhere at the moment but the market does seem to be finally sensing that Osborne’s honeymoon period is ending. This can be seen on the chart above where 5-year gilt yields are once again trading above Germany and while still under troubled France it should be noted that the recent patch of French bashing in markets hasn’t translated to any further outperformance for gilts. In fact 5yr UK/FR spreads have come in by nearly 30bps since early August even though yields in nominal terms have performed well.
The same can be said for Sterling’s earlier resilience which has similarly evaporated over the past few weeks. Cable continues to head towards the GBP/USD1.55 level we outlined at the start of last month (even if it did move a little higher than we’d anticipated first) from where the more important support area around 1.5350 comes into play. This line needs to hold to avoid a move down into the 1.4800/30 area which should be the ultimate goal of sterling bears and their fundamentals arsenal. Cable shorts ought to look to hold out while resistance at 1.5900/5930 remains intact in the first instance; those with deeper pockets should be happy to continue fading rallies right back to the mid 1.61’s (where mid-term moving averages are congregating) which ought to mark the top of the wider – and descending – trading range.
Touching on EUR/GBP briefly, the picture looks a little more constructive from a GBP perspective, the short and medium- term picture is soft for the cross with room for sterling to recover back to the 0.84/0.85 area into year-end, 0.88 being the immediate cap on the topside. But to look for anything more substantial for the pound looks optimistic even in an environment where the broader euro story is so negative.
The ECB reaffirmed its inflation fighting credentials, raising rates a further 25bps to 1.50% at its July meeting, as we expected. Governor Trichet’s term may be drawing to a close (November) but there was no sign of any mellowing in his tone, reminding at this afternoon’s press conference that monetary policy is still accommodative and hinting that further tightening was needed despite the economic risks surrounding the seemingly never-ending peripheral debt crisis. There was at least one concession, the announcement that the ECB would suspend its minimum credit rating threshold for Portuguese bonds until further notice, citing recent fiscal steps. But there was little real slack for governments hoping for any substantial monetary tonic. The suggestion of higher rates was enough to tempt money back into the EUR, though the Euribor strip was little changed on the day suggesting FX traders might have got ahead of themselves. Overall the EUR/USD picture is modestly bullish, we’d expect most will look to continue plying the range here, which on our chart looks set at 1.4160 – 1.4590 for the moment.
This backdrop couldn’t contrast more starkly with the fortunes of the pound with the BoE holding rates again. There is little prospect of a hike this side of 2012 and given the patchy nature of the economic recovery even then the MPC is unlikely to be in that much of a hurry having sat through the current CPI hump. Sterling has already suffered on the back of the increasing spread between UK and Eurozone rates with EUR/GBP hitting 0.90 again. £8.00 cups of coffee (we won’t even contemplate what a beer costs) on the Cote d’Azur might be enough to persuade continental holiday makers EUR/GBP shorts are the way to go but it’s unlikely the pound will see anything but a short-term reprieve without a marked improvement in macro data.
2-year swap spreads suggest that there isn’t any floor under sterling; in fact the risk seems to be skewed to further weakness in trade weighted terms. Of the major crosses GBP/USD looks the more interesting prospect technically. The tone here is decidedly bearish sub 1.6140/60, in fact sub 1.6300 where TL and some of the more important longer-term moving averages are packed. The first downside objective is to crack the recent intra-day lows at 1.5911/14, a stone throw away now. Through there a run towards the 38.2% Fib line (1.5789) would be the aim. This needs to hold to avoid a deeper move back into the 1.5500 congestion zone and the Sep/Dec lows around 1.5350.
Related articles
- ECB increases interest rate by .25% to 1.5% (politics.ie)
- Interest differentials will worsen for the Pound – more than the market thinks (tradingfloor.com)
EUR/JPY has had a modest pullback after the late June rally stalled at 117.80 resistance. The range traders should be encouraged by this with the base of the recent trading range down at 113.50/114.09 (200-DMA) compared to current levels around 116.96, which is pretty close to a three to one risk reward ratio for a short. While there aren’t any particularly compelling sell signals popping up on our daily indicators yet the hourly charts do hint at downside pressure.
On the fundamental side the Japanese are obviously keen to see a weaker yen but intervention prospects look rather slim currently. We’d probably need to see USD/JPY to make a decent run through 80.00 to prompt further BoJ buying. Equity gains are probably the greater risk for EUR/JPY bears, keeping pressure on the principle funding currencies (JPY/USD/GBP) where the policy stances are markedly divergent from the ECB’s. While we’re bullish equities on a multi week time frame after the strong gains of last week some consolidation wouldn’t be surprising which in turn would allow the EUR to drift lower in the short-term. Eurozone debt problems are rarely off the front pages too, underlined by this evening’s decision to cut Portugal’s debt rating to junk (Ba2) which ought to counter another (probable) ECB rate hike on Thursday.
Against this backdrop any run back towards EUR/JPY117.20 should be viewed opportunistically, working a stop on a close above 117.80. Shorts should add if 115.80/90 falls with a 114.30 target.
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- Forex – EUR/JPY up in Asian trade (benzinga.com)
