Global Themes

More volatility expected in 2019
- Sterling shows spirit
- Markets settle as data dump awaits
- Is a soaring yen a bad sign?
- Payrolls and Powell

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GBP

Sterling shows spirit
Sterling has rebounded from near 20-month lows against the US Dollar to retake the $1.26 handle and march towards $1.27. Concerns about the Brexit outcome are still weighing on the British Pound and yesterday’s sell-off highlighted the lack of appetite to buy Sterling amid global risk averse trading. UK services PMI this morning is expected to reveal an uptick to 50.7 in December from 50.4 the previous month, but this is still worryingly close to the 50 threshold, which separates expansion from contraction.

GBP/USD could face a volatile day today ahead of next week’s busy Brexit calendar. A surprise uplift in UK services data could help lift the pair towards $1.27 and re-test December highs. However, any upside momentum will likely remain capped due to Brexit uncertainty. $1.26 should offer short-term support to the downside, though the mini flash crash yesterday has opened the trap door to some worryingly low levels for British importers. GBP/EUR has regained the €1.11 handle this morning having slipped over 1% and below €1.10 yesterday.

UK Parliament returns from its holiday recess next week and the big Brexit deal debate will recommence. The government is already stepping up plans for a no-deal Brexit, which could be the more likely outcome if Prime Minister Theresa May’s Brexit deal is rejected the following week.

Markets

Markets settle as data dump awaits
The big news this week was Apple Inc’s profit warning, linked to the US-China trade conflict, which triggered a wave of risk aversion and unprecedented gains were made by the safe-haven Japanese Yen. As expected though, most JPY currency pairs have corrected somewhat this morning, including GBP/JPY rallying over 1-cent to test the ¥137 handle. Markets now brace for an eventful data calendar today as well as the return of full markets as Japanese markets open for 2019. UK services PMI is due at 9:30am and Eurozone flash inflation data at 10:00am. US payrolls hogs the limelight at 1:30pm this afternoon.

JPY

Is a soaring yen a bad sign?
Warning signs are growing that the global economy is slowing. Not only are bond yields plunging but gold is rising and safe-haven currencies, particularly the Japanese Yen are catapulting higher. Worries over global growth and trade wars became more of a reality when Apple Inc issued its profit warning, sending tremors through markets and triggering panicked reactions. Many analysts are now suggesting that rising demand for gold and yen should ring alarms bells that markets and the global economy could be in for a very volatile year ahead.

The yen has become the talisman of safe-haven currencies but really in risky times it is the popular “carry trade” strategy that strengthens it. In stable stress-free market conditions, Japanese investors seeking higher rates of return will sell JPY and buy assets overseas and higher yielding currencies. However, in stressful and risky times, these carry trades are reversed, effectively boosting demand for the yen, which can rocket higher as a result.

Huge moves for JPY have historically coincided with some major market events, such as the financial crisis in 2008. With Brexit looming, 2019 could be a rocky ride.

USD

Payrolls and Powell
The salient risk event from across the pond today is the US jobs report revealed at 1:30pm. Considering recent volatility, this event could have minimal market impact in comparison, especially if the non-farm payrolls figure for December comes in as expected at 177,000. However, what used to be a big event in the currency market a few years ago, has proved anticlimactic of late, even if the payrolls figure missed forecasts. The unemployment rate is forecast to remain unchanged at 3.7% but average earnings are forecast to drop a tick lower to 3.0% from 3.1% y/y.

EUR/USD is staging a valiant attempt at retaking the $1.14 handle after its 1% drop to $1.13 on Wednesday. The currency pair is hovering in the higher end of its 10-week range predominantly between $1.13 and $1.1450, though a sustained break above $1.15 has been unsuccessful since October last year.

Investors are likely to pay closer attention to Federal Reserve Chair Jerome Powell’s speech at 3:15pm. A less hawkish rhetoric is possible due to the recent market turmoil and global unease. This could weaken the dollar and push EUR/USD beyond the key $1.15 resistance.




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