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Currency Market Analysis

Sep 15, 2020 | Currency Market Analysis

Global Themes

• Tuesday Technicals - In for a penny, in for a pound
• What the Experts Say?
• Coming up this week?

Tuesday Technicals - In for a penny, in for a pound

The UK Government seems to be betting the house on their next move in the Brexit negotiations. The move would see the United Kingdom leave the EU with no deal, potentially leading to much a less united Kingdom. The plan, if implemented could break international law, a step many feel is a violation of the ethics the British hold so dear. Pride in the fact that they honor their commitments above all. The world has always been able to trust the British at face value, if the agreement that was signed gets ripped up it may be a turning point for Europe. The current government message seems to be, “in for a penny, in for a pound”.

The latest spat is part of the ongoing and seemingly never-ending saga where the current UK leadership seem to be trying to have their bread buttered on both sides. However, the EU is standing firm and have categorically stated that what the UK is trying to do is just not cricket and possible legal action would make an even bigger mess of the current proceedings.

Some political commentators feel this is all part of the negotiation dance common at this level, where others feel Prime Minister Johnson is making a mockery of the British way. Former Prime Ministers Tony Blair and John Major have added to the voices of those opposing Johnson's current plan as “shocking”.

As can be expected, all the uncertainty has meant the Great British Pound remains on the back foot and has slid around 5% in the last 9 trading days against the USD. Against the Kiwi we have seen the GBP weaken by around 6% in the last 16 trading days significantly more than any of our other major trading partners over a similar period.

The NZDGBP is now within striking distance of the highs seen in July of around 0.5245 and if the current political brinkmanship and uncertainty were to continue it is possible that we continue to push higher. If we were to break through the previous highs, we could be on way to 0.5440 and possibly even get as high as 0.5505.

But we have been here before. Back on 16th June you may recall us citing a similar inflection point, and if you took cover as an importer then in the mid 0.51s you would have done pretty well for yourself. And it must be said that while the current turmoil can most certainly extend, we could just as quickly wake up to a Boris Johnson U-turn and the pair could be headed back to the recent lows. Vigilance when something has dragged on as long as it has is difficult, but it seems now is the time to refocus on the United Kingdom, Brexit and a strategy of both protection but participation.

What the Experts Say?

HSBC – “Sterling has moved into a risk-on currency. Why? Because we wanted to be global, we didn’t want to be part of the European Union, we didn’t want to be part of the big closed economy, we wanted to be an open economy. And now we are, our currency trades like a medium-sized open economy, so it does swing around very violently.”

Westpac – “Thursday’s GDP figures will reveal just how big of a blow Covid-19 dealt to the New Zealand economy. We estimate that economic activity fell 11.5% over the June quarter. That would be the largest drop on record.”

BNZ – “The ongoing forward guidance is the key to the market maintaining its current pricing. Any moderation in this guidance whatsoever would likely see the market pricing in negative rates for the February (or even November) meeting.”

ANZ – “Despite all the talk about rate cuts, kiwi remains elevated. This contributes to our view that a negative OCR will be a dampening force on kiwi, not a catalyst for sudden adjustment.”

Coming up this week?

Central banks take center stage this week with the Fed meeting on Thursday morning and the Bank of England meeting on Thursday night. The Fed story has undoubtedly been bearish for the dollar over the last couple of months, but this time it could well be different. Perhaps the Fed has done all it can this side of the November 3rd presidential election so Thursday could be a tad risky for the USD bears. As we have highlighted the GBP is currently on the back foot as investors adjust to the possibility of a no deal Brexit and start to build GBP shorts in anticipation for this. We are not expecting any change in policy from the BOE at this point however our focus will move to the November meeting which should be far clearer following the October 15th Brexit deadline. Locally we have GDP data for Q2 released on Thursday morning which should show a record contraction, however considering this is Q2 data it should have little effect on the kiwi. A similar story in Australia this week, we have RBA September meeting Minutes and employment data on Thursday, and it will be interesting to see if the prolonged Vic shutdown will have an meaningful impact here. Finally, it looks as though Japan’s next PM is set to be Yoshihide Suga who is expected to maintain “Abenomics” which should keep a lid on the JPY’s appreciation.

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