You’ll be reassured that this morning’s daily brief is not a homage to the BBC One day time television program. Whilst I’m sure the retired program has played a significant role in the furlough of many an individual across the UK, its relationship to the foreign exchange market is somewhat more tenuous. Instead I refer to the speculative hunt for value as a more positive risk sentiment across the market and a greater understanding of the nature of Coronavirus facilitate a return to investment. So far the world has provided about $8tn in fiscal stimulus alone to help populations weather the storm of Coronavirus. Those that so far have been perceived as successful in these endeavours are candidates to become prey to speculative acquisition.
The laggards in the response to coronavirus so far have been largely located between longitudes 15° and 31° East. There is cluster of underwhelming fiscal responses in Eastern Europe and Africa. The underwhelming responses in Eastern Europe are largely limited to the countries that make up the Balkan states. With such sturdy support for the global economy across much of the Western World, idle money that previously took harbour in the form of cash is beginning to be allocated to productive use. With valuations stretched immensely by the turmoil of the coronavirus, the efforts can aptly be described as a bargain hunt.
The UK was a candidate for the bargain hunt yesterday. Having seen a corrective sell-off since the middle of this month and with one of the most generous fiscal response plans on the planet behind it, the UK Pound and the assets it underlies are luring some investors. There are some risks that stand in the way of the Pound and a successful bargain hunt. The two most important ones and the ones you must be aware of today involve 1) Brexit and 2) Oil.
Brexit negotiations have been taking place this week on the future relationship between the UK and the EU. The negotiations have been on the punchy stuff – Trade in goods Tuesday-Thursday, followed by trade in services; law enforcement Tuesday to Wednesday morning. If you’re interested you can find the full schedule for the negotiations here. The negotiations have of course started a little late (10:30) and allowed a generous lunch break (13:00-14:30) to accommodate European gastronomie, but the punchy nature of negotiating matter does have the propensity to create severe headlines at the press conference scheduled for tomorrow. If progress can be attested to with the Brexit deadline barrelling down then the Pound’s fortunes will be reversed with a sharp correction higher. If there is a down and out tone then the Pound will continue to trace lower anticipating similar frustration at the next meeting in two weeks’ time.
The oil market excitement this week has also created a short term vulnerability in the Pound. The chaos in the market for front-month WTI oil this week caused volatile flows that were damaging to commodity and oil-exposed currencies. Due to its exposure to North Sea Brent Crude oil, the UK Pound also has a vulnerability and concern for the price of the black commodity. We wait to see whether the erroneous pricing that captured the front-month contract’s expiry that took place in the US this week will also happen to North Sea oil on Thursday next week. There will be bargain hunters out there that want to be first to market and will add Sterling and UK assets to their portfolio based on a dodgy projection of these two events but the lion’s share of acquisitions will take place once the fate of these two risks becomes clearer. Expect a volatile week of trading to dominate the Pound.
Discussion and Analysis by Charles Porter