Morning Brief – Cat’s eyes

Cat’s eyes

A useful perspective or model to employ for evaluating where the Pound is headed is by looking at where it is within its tight post-Brexit trading range. We produced a visual analysis previously that showed how Sterling was right at the top of that traded range on a trade-weighted basis and therefore, in the absence of credible progress in Brexit negotiations, it would be vulnerable to a correction lower. As you will have seen, that correction was delivered – and then some. The Pound actually broke out of the lower end of its range. However, given the turmoil in which markets facilitated this move it can’t be considered the death of the post-Brexit range and instead a blip.

The interesting point to be made from this perspective is that the Pound is exactly in line with its mean valuation post-Brexit. What I mean by that is the value of the Pound today on average versus every other currency is identical to the average level that it has been at every day since 24th June 2016, the day after the Brexit referendum. We are right in the middle of the road. So what does this mean for the Pound? Well, we know that the Pound is going to want to break out from that middle ground to bury itself within the upper or lower half of that range as the Sterling bulls and bears vie for position. Much like driving in the middle of the road, the path should be bumpy as the tyres run over the cat’s eyes and Sterling moves to avoid short term obstacles. Increased volatility is one again the order of the month therefore. However, the global liquidity glut created by central banks at every corner of the globe will go some way to limit the severity of this volatility.

The first of such obstacles will be presented today by U.K. Foreign Secretary Dominic Raab. As the first secretary of state standing in whilst Prime Minister Johnson recovers, he will be responsible for presenting the lockdown verdict to the nation. Today’s announcement comes as the death toll stands at 12,868 and limited but tangible evidence that the daily death toll is credibly plateauing. The UK chief medical officer gave two interesting insights into the potential decision to be delivered today. Firstly, Chris Whitty mentioned that we are “probably reaching the peak overall” – a hedged but decisive remark that progress is being made despite a lack of complete clarity. Secondly, the chief medical officer gave his remarks on the all-important rate of infection, the r0. He said, “it’s between about 0.5 and 1”. Another crucial statement that confirms the UK infection is receding but once again fraught with hedging language. Crucially the officer suggested we will be able to judge the spread of this infection rate much more accurately, and therefore judge when to emerge from the lockdown, “over the next 10 or so days”. Another important statement, another blatant hedge!

From this information we should expect an extension of at least 10 days and, under more protective circumstances, a lockdown extension into May. The duration of any extension is important as the decision is the result of a battle between viral protection, long-term mental and physical health and the economy. The shorter the lockdown period the less damage is done to the economy, the quicker the burden on the UK treasury disappears and the less our long term debt pile balloons out of control. We have already seen evidence of the foreign exchange market pricing value into currencies that emerge from lockdown and demonstrate credible normalisation in their societies and economies. Aside from the absolute date of the extension it will be crucial that Raab provides a credible strategy to emerge from the crisis to support record low confidence within business. The more clarity is given about how we emerge as well as when we emerge, the more likely it is that businesses remain open, staff remain working and the economy stays as close to normal as possible.

Discussion and Analysis by Charles Porter

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