Morning Brief – Thursday 6th September

Buy the Rumour, Sell the News:

Magnificent volatility was seen in the Pound Sterling yesterday as traders manoeuvred themselves around little more than playground chatter. At market open, Brexit concerns had hampered the Pound, with positive PMI data insufficient to raise the domestic currency any more than a few basis points. In the euro, concerns surrounding the Italian fiscal stance subsided, with Italian bond yields reaching a one month low and the Euro appreciating gently. The two-sided game of a Brexit also supported the Euro as we headed into the New York session. Emerging markets seemed to have had their last hurrah of this micro-bearish trend yesterday, with considerable consolidation this morning in the Rand and Lira.

• GBP: The churning of the Rumour mill yesterday supported the Pound, generating a positive risk sentiment surrounding the domestic currency this morning, with the Pound elevated and holding numerous key resistance levels.

• EUR: A deal is good for the Euro too; the single currency trades higher by thirty basis points as Italian risk fades and Brexit sentiment thaws.

• USD: Rebalancing against consecutive days of aggressive Dollar Strength, the Dollar has taken a considerable dip this morning.

• EM: Emerging markets gather pace and strength whilst contagion fears are repriced following days of intense selling.

Pound Sterling:

FAKE NEWS!

An immense buying episode occurred yesterday within the Pound Sterling to raise the domestic currency by approximately 1% in two minutes. The episode lasted only about an hour, with ‘trust thy neighbour’ – or blind faith – being the only visible trading strategy. By the middle of the European afternoon session, the domestic currency had lost approximately two thirds of the value created by the speculative “headless chicken” episode.

The news that moved markets yesterday following positive comments from German Chancellor Angela Merkel was a series of messages in a trading “chat” forum that suggested Germany and the UK had mutually agreed to drop key (and inhibiting) demands on a post-Brexit trade deal. In what later turned out to be largely unsubstantiated gossip, the Pound sold-off once again, however, maintained at least some of the momentum that the news had given markets.

The Euro:

Good for you? Good for me!

The speculative buying of the Pound yesterday afternoon was the overwhelming trade of the day; scraping past the selling of every emerging currency you can get your hands on. But yesterday also gave a timely reminder that Brexit is a real problem for Europe too.

The displacement in Cable (GBPUSD) was far greater than the appreciation in Sterling-Euro, as the Euro also rallied on the news. Within the EURUSD cross, a jump of approximately 0.5% demonstrated just how important Brexit is to the Eurozone too. With this timely reminder, I think it’s possible that we see a warmer reception to negotiations in Europe.

The Dollar:

Take a Breather:

This morning the Dollar has been trading with a flat enthusiasm following the aggressive post-Labor Day shortage rally and general bullish Dollar sentiment. Given the limited extent of the move this morning, the sell-off can confidently be considered a rebalancing trade, however, given the sentiment over the past week of an overplayed Dollar rally, a watchful eye should be kept on the greenback. Tomorrow we see the release of all-important payrolls data for August with considerable downside risk.

Emerging Markets:

Chill Pill:

Yesterday saw the value of a few casual percentage points wiped off the value of the Rand once again. The aggressive selling momentarily tipped the GBPZAR cross above 20, and allowed the Rand to soar through 15 against the Dollar. When compared with the domestic fundamentals, the selling of the Rand appeared overplayed. Given the correlation of Rand and Lira moves to the aggregated MSCI emerging market index, the moves can wholeheartedly be considered to be dependent upon contagion and hysterically compounded with the headline of a recession in South Africa. Despite a gloomy image, 20 may simply not have been justified, resulting in large take-profit trading this morning.

Discussion and Analysis by Charles Porter

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