Morning Brief – Tuesday 18th

Mario, Mark and Jay

The Pound was the biggest loser yesterday, sliding virtually unimpeded through numerous resistance levels. Brexit has been a challenge to Sterling’s value to say the least, however, the implications within its biggest crosses is alarming. Despite enjoying an ailing US Dollar in the more immediate aftermath of Brexit, a resurgent greenback is now showing the Pound exactly what it’s (not) worth.

Sliding through the 1.20s this week leaves Sterling only a cent or so short of its post-Brexit low versus the Dollar. Beyond that it’s down to the disasters of 1985 when GBPUSD parity was at the Pound’s doorstep. The increasing lead of Boris Johnson in the race to become the next leader of the Conservative Party and Prime Minister of the United Kingdom leaves the political risk profile of Britain uncomfortably high. The official endorsement of Boris by Matt Hancock, who this weekend quit the race to become PM, has brought with it further support for the former foreign secretary. Interviews given by those opposing Boris also revealed uncomfortable hints towards their concession towards his candidacy, as they appeared to line themselves up for potential portfolios in his future cabinet.

The second round of voting will take place today with 33 votes now required in order to proceed to the next stage. Only Boris, Hunt and Gove passed this threshold last time and the bookmakers’ new second favourite Rory Stewart, who last time received just 19 votes, could still be shy of this level. The retreating appetite to take ownership of the Pound and its consequent weakening is a reflection of the disturbing Johnson lead.

The US Dollar continues to receive solid support on price dips as markets take stock of just how dovish the Fed could realistically be in their forthcoming interest rate decision tomorrow. Markets are questioning their conviction to the premise that the US monetary authority could cut rates, lifting the yield on debt across the curve, providing strong Dollar support. Short-run data is not on the side of a loose US monetary policy outlook, however, if the Fed maintains its opinion that weak data will prove transitory and growth will persevere then bonds will continue this week’s sell off and the Dollar will make further progress. This US economic cycle has been particularly long but the improvement in economic output versus the trough is abnormally low. The same remains for the global economy with GDP in the Eurozone, for example, only 10% above its crash following the European sovereign debt crisis.

This week will prove testing for global central banks. Mario Draghi is speaking as we send this briefing. Speaking in Portugal, a dovish presentation has caused the Euro to sharply devalue by 0.4% already. A reminder by the President of the European Central Bank that rate cuts remain a part of the ECB’s tool kit, and that he’s not afraid to use them, has caused expectations for European interest rates and economic growth to be downgraded. In reaction, money market traders have introduced a 10 basis point interest rate cut by December within the Eurozone. The Bank of England will also provide their latest monetary policy decision this Thursday.

Whilst many of our clients have heeded the concerns of a fragile Hong Kong Dollar peg, the protests in recent days have continued to pile pressure on the fix. Disruptions to economic life caused by the protests and with public expenditure realities and expectations raised in the face of the violence, the fund available to defend it is drying up. A break could be months away, if ever, but the risks are stacking up.

Discussion and Analysis by Charles Porter

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