Tag Archives: GBPUSD

Brexit Bill Increased

Discussion and Analysis by Grace Gliksten
 

It has been reported that Prime Minister Theresa May won ministerial support to increase the Brexit offer from €20bn to €40bn yesterday. May is hoping that the increase will unlock stalled negotiations, but has been warned by Eurosceptic colleagues that this is conditional upon securing good transition and trade agreements with the EU. The increase is intended to close the gap between the UK’s initial offer of €20bn and the €60bn expected by the EU.
 
Ministers have speculated that the promise from the UK to respect its outstanding EU commitments could mean a bill of €40bn to €50bn. While the UK accepts some obligations, there are several questions surrounding the full details of these. These include the issue of pensions for EU staff, and how the UK’s contribution is calculated. Another contentious issue surrounds the question of building projects that have had funding approved by all EU states, but where work will not start until the Article 50 process has been completed.
 
The increase was approved by a 10-member subcommittee in Downing Street yesterday. One minister said, “there is consensus behind the prime minister’s position – for now.” Foreign Secretary, Boris Johnson, was part of the subcommittee and one of the members who agreed that the increased offer should be dependent upon the EU opening transition talks in December and settling on an encouraging trade agreement next year. Another member who agreed with Johnson said, “it has to be something for something … this can’t be unconditional money.” Eurosceptic ministers have also said, however, that Britain should be prepared to walk out of talks if a bad trade deal is proposed by the EU. This follows the same tone as May who said, “nothing is agreed until everything is agreed”.
May is expected to wait until the last possible moment before making her improved financial offer. She has confirmed that the offer will only be made when she is sure that it will break the stalemate in negotiations ahead of the EU summit next month. 8th December has been signalled by officials as the date the offer will be made, despite Michel Barnier’s, the EU chief negotiator, pressure to deliver the proposal by the end of this week.
 
May is holding off on the offer in order to gain the most leverage in negotiations.. May is waiting for assurances from EU leaders that the proposal would be received favourably and wants the European Council to declare that first round talks have made “sufficient progress”. She wants the increased offer to help open talks on the transition deal and trade agreements.
Negotiations have been complicated by the current political uncertainty in Germany. The breakdown of talks to form a coalition under Chancellor, Angela Merkel, has left Germany in an unprecedented political crisis. With both the coalition and Merkel’s position unclear, May has been encouraged to exploit the current weakness. However, Thomas Matussek, former German ambassador to the UK, said, “I think German instability is bad news for Britain.” Moderating these comments, he added that he believes that the problems in Berlin would make “no operational difference” to the EU’s position on Brexit.
 
The Pound has benefited from positive Brexit news, improving across the board since the decision. Against the Euro, German political instability has exacerbated Sterling’s strength. The Pound rose 0.69 percent against the Euro, moving from 1.1230 to 1.1305, still short of the gains made at the end of October. It also increased 0.59 percent against the US Dollar, from 1.3175 to 1.3264.
 
 

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Safe Haven Currencies

Safe Haven Currencies are an imperative, yet complicated, business. Rising in value and price in the face of Geopolitical and general uncertainty and risk, their trend often defies not only other asset trends but also logic. In this article, we analyse known havens and the possible causes for their existence. 

 

US Dollar

 

The US Dollar is not a safehaven. That may come as a surprise because one could make a strong argument for its stability as the most liquid and heavily traded currency in the world. This characteristic, in fact, is confusingly why it is not a safehaven. The liquidity and stability of the US Dollar in good times is one of the reasons why it is the world’s major conduit for business. Companies and corporations over the world flock to the consistent purchasing power of the Dollar, supported by an immense population underneath it.

 

This corporate and financial exposure of the US Dollar is why it is not a safehaven. When times are bad, i.e. when global geopolitical risk is mounting and looking unsustainable, it is these institutions that investors and stakeholders wish to minimise their exposure to. Therefore, there is a de facto exodus from the dollar, flooding market supply which, when met by low demand, allows the price of the Dollar to fall.

 

Despite lacking the status of a safehaven, the US Dollar is unequivocally stable and, unsurprisingly, a popular currency amongst the expatriate community. With the Dollar consolidating considerable value over the past few weeks, many analysts see little reason for this trend to reverse into 2018.

 

 

Japanese Yen

 

The election is dominating the political economy of Japan at the moment. Before this weekend’s event, most immediate fluctuations in the value of the Japanese Yen are likely, although not certain, to be derived from the leadership contest. However, with crises of industry affecting wider Japanese markets, the supremacy of the election to the Yen cannot be guaranteed.

 

Critically, also, the Yen is a fully fledged safehaven currency. Therefore, whilst the domestic environment will be reflected in the value of the Yen, the global geopolitical atmosphere has the propensity to make the Japanese currency highly volatile. As a central safehaven asset, alongside the Swiss Franc and Gold, its price is proven to vary inversely with other non-safehaven currencies.

 

Therefore, whilst the value of the Yen may, at times, be uncertain, it can usually be considered overpriced in globally bad times and under- or fairly priced during good times. The rising tension within the Koran Peninsula creates an interesting new dynamic within Japan and the Yen. Whilst the value of the Yen should rise during times of geopolitical uncertainty and insecurity, its geographical proximity to the epicentre of the troubles makes its relevance as a safehaven against North Korea questionable.

 

 

Swiss Franc

 

For almost 100 years, the Swiss Franc has acted as a safehaven currency. A politically and socially stable country, Switzerland is also a quintessentially neutral player on the international stage. Known for its strong and entrenched financial system, confidential banking and low inflation rates, it is considered by many to be one of the most stable currencies in the world. Although these are some of the most likely reasons why the Swiss Franc is a safehaven currency, the nature of a safehaven currency means one cannot know for certain.

 

What we do know is that investors flock to the Swiss Franc when geopolitical or natural challenges arise. Bucking the trend, when all other currencies seem to be shedding value, the Swiss Franc appreciates. The Swiss Franc is essentially a disaster fund, so whilst you may not protect yourself against inflation and loss in good times, you can be confident that the Franc will stay strong.

 

 

Moderate Dollar Strength

Discussion and Analysis by Charles Porter:

Labour market performance within the United States offered a short-lived boost to the US Dollar. However, the rest of the US trading session eroded the underwhelming gains made on the back of convoluted, contradictory employment data. The erosion of the value of the US dollar, for example within the Eurodollar cross, can be partially attributed to Euro re-balancing. However, the perceptibility of a Dollar reversal across all Dollar-related currency pairs suggests an endogenous Dollar retraction.

 

The headline figure of a decrease in the rate of unemployment, by 0.2%, offset weak payrolls data that saw 33,000 jobs lost in September non-farm payrolls data. The effect upon the US Dollar was temporarily positive in response to the unemployment rate. The effect was subdued, however, given the anticipated inaccuracy of hard data to economic performance following a smattering of natural disasters within US territory.

 

The performance of the US dollar against its most globally significant counterpart, the Euro, is particularly intriguing. Displayed below, the currency cross can be shown to continue its intraday trend with almost complete disregard to the US employment data. Having previously analysed the payroll and unemployment figures against the US Dollar, this article instead seeks to examine the erosion of value that has purported to make hard data redundant.

 

 

Last week’s trend of Dollar strength, is presented as a cyclical re-balancing following an unjustifiable spout of Dollar weakness amidst Euro strength. Kick started and maintained by the promise of a before-year-end interest rate hike, the re-balancing of the Euro is derived from expectations of Federal Reserve action, despite a weak rate of inflation. Moreover, whilst geopolitical risk surrounding the Dollar remains high, it is also becoming slightly dated. As investors believe they have fully priced in the enduring risk derived from the heightened tension within the Korean Peninsula, the Dollar is less constrained and can move freely.

 

Political risk and uncertainty within major reserve currencies outside of the US Dollar appear to be mounting. This changes the cost-benefit decision of holding US Dollars – one of a finite and scarce list of international reserve currencies. For example, the Euro is currently being plagued by the Catalonian conundrum. As Puigdemont faces off against Spanish Prime Minister, Mariano Rajoy, the political risk within Spain and potentially the Eurozone, forces investors to factor uncertainty within their allocation decisions, attracting their capital to other currencies. Similarly, with the fifth round of Brexit negotiations scheduled to start this week, the perseverance risk posed by Brexit is reluctant to abate.

 

Perhaps the retrenchment of US Dollar gains following a positive data release is due to market concerns about a forever-stagnant inflation rate. This would imply that following the immediate currency market euphoria that appreciated the US Dollar on the back of strong unemployment data, investors internalised stagnant inflation, in conjunction with accommodative monetary policy and low inflation, to signal the evolution of a new economic paradigm; one where interest may never rise.

 

This perhaps forebodes the later speech of permanent member of the Federal Open Market Committee, the body responsible for setting US interest rates, William Dudley. In his New York address, the President and CEO of the New York Federal Reserve Bank, highlighted that hyper low inflation is likely to be, in part, attributable to “more fundamental structural changes”. Therefore, perhaps the unexplained reversal of gains within the US dollar are down to investors’ repricing the probability of multiple 2018 interest rate hikes.

 

The Dollar has consolidated strong gains this week, trading at more comfortable levels against the Euro and the Pound, and escaping the highs in excess of 1.20 EURUSD and 1.35 GBPUSD. The sustainability of these progressions is likely to be challenged on short term, idiosyncratic bases. Therefore, the medium and long-term trend for the US Dollar appears likely to be biased in favour of a steady and considerable appreciation.

 

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German Elections and Brexit

Our Foreign Exchange Specialist, Charles Porter, speaks with London School of Economics Associate Professor, Dr. Waltraud Schelkle. Regarding Brexit, we discuss how the passing of the German election may accelerate progress within negotiations as well as the possibility, acceptability and likelihood of a Second EU referendum within the UK. 

 

 

 

 

 

 

 

 

 

Understanding the Brexit process, including the rate of progress and the final outcome, is critical when attempting not to get caught out by foreign exchange markets. Our analysis and opinion allows you to make informed decisions and exploit currency market fluctuations to find the best, unique, solution for you.

 

 

To Hedge or Not to Hedge – Part 2

Discussion and Analysis by Charles Porter

 

Today our social media interactions indicated an uptake in hedging options including the use of forward contracts. Specifically, corporations concerned about their exposure to import markets and international firms vulnerable to payroll and exchange transactions are seeking insure against downside risk and exchange rate fluctuations. The present uptake in hedging is explained by the strength of the Pound against the Dollar and, to a lesser yet significant extent, the Euro. This article concludes in favour of the appeal of hedging for your corporate and personal currency exposure.

Part Two – Is hedging advisable; are we at the peak?

 

Having produced an analysis of a post-Brexit Sterling devaluation in part one, the second part of this article seeks to understand whether Sterling’s present value is derived from a correction of the negative, post-referendum, currency effects. This in turn will inform a conclusion in favour of, or against, further hedging based upon whether the value is likely to be sustained or short-lived.

 

The value of hedging will therefore be partially determined by whether the pound’s current strength is a restoration of certainty or breakthrough on Single Market access. This will identify whether the pound’s strength is likely to be sustainably valued in the short and medium-term, or whether the present value is overweight and should be capitalised upon through hedging. Ultimately, we conclude in favour of the latter option.

 

Sterling’s current strength appears to be derived from short term shuffling by central bankers. An overwhelming volume of dovish central bank policy announcements have been accompanied by surprisingly hawkish statements. In fact, much of the pound’s revaluation has been propelled by speculation over future interest rate hikes and the reduction of monetary stimulus taking the form of a tapering of the asset-purchase program, quantitative easing.

 

The shift around mid-September that pushed, for example, Sterling-Euro through the Pound’s resistance level and Euro support levels was monetary policy rhetoric. Whilst the predominant rate-hike rhetoric was empirically supported by rising inflation and low unemployment, the overwhelming currency shifts based upon Sterling strength came from the words of individuals. For example, a characteristically dovish member of the Bank of England, Gertjan Vlieghe, spoke in London suggesting a Bank Rate adjustment “in the coming months”.

 

Furthermore, it is unlikely that the Florence Speech of Theresa May, UK Prime Minister, will be considered by the EU27 to be at all sufficient to progress with second round – future relationship arrangement – talks. This will be true should a back-door translation of May’s speech within the confidential meetings of UK and EU negotiators not facilitate progress and guarantees. Progression seems likely given that, despite the third-round dedication, a solution for the Irish border has not been found; neither EU citizens assured, nor an exit bill indicated.

 

Altogether, this suggests that Brexit uncertainty in particular has not been reduced. Therefore, a central mechanism behind Sterling’s long-term devaluation has not been addressed. Sterling’s gains may therefore not survive the medium term due to the rhetorical, intangible and underminable nature of its short term gains.

 

Ultimately, we must therefore conclude that for the risk averse individual, hedging may be a highly beneficial tool. With central bankers speaking in their droves this week, their individual positions should be elucidated, awarding limited predictability to sterling currency pairs. Nevertheless, the fragility of Sterling’s gains in non-normal monetary policy times should not be underestimated. Corporate requirements for hedging may include a protection of the Sterling costs of an international payroll, a reduction of importation expenses and value protection. Contact us to arrange any of these services.

 

 

To Hedge or Not to Hedge – Part One

Discussion and Analysis by Charles Porter

 

Today our social media interactions indicated an uptake in hedging options including the use of forward contracts. Specifically, corporations concerned about their exposure to import markets and international firms vulnerable to payroll and exchange transactions are seeking insure against downside risk and exchange rate fluctuations. The present uptake in hedging is explained by the strength of the Pound against the Dollar and, to a lesser yet significant extent, the Euro. This article concludes in favour of the appeal of hedging for your corporate and personal currency exposure.

 

The value of the United Kingdom’s Pound was certain to fall following a vote to leave the Union. This was a foreseen spill over of secession and caution was offered, although not always heeded. Whilst a devalued currency is often desired due to its capacity to make domestic exports more competitive, a sudden currency devaluation within an economy with a high marginal propensity to import is more troublesome.

 

The UK economy imports a considerable cross-section and volume of its total consumption. Therefore, an extremely non-negligible proportion of the Consumer Price Index representative basket of goods is either a direct import, or dependent upon imports to some extent. As the principal measure of price inflation, we can credibly assume, therefore, that a weak pound will raise inflation.

 

To evaluate the benefit of hedging any exchange rate risk it would be important to understand any corporate or personal exposure to currency fluctuations. However, to generalise this analysis, an evaluation of the present valuation of the Pound Sterling amongst the post-Brexit paradigm is presented.

 

Against the United States’ Dollar, the Pound Sterling now trades above or around Sterling’s value on the 24th June 2016; the day after the EU referendum. From this perspective, it is plausible that the Pound may have secured a justified, or unsustainable, overweight value against the Dollar. However, in order to analyse the benefit of hedging it is necessary to establish whether the upwards correction in the value of the pound is a response to the underlying cause of its June 2016 devaluation (and thus correctively sustainable) or alternative, short-run movements.

 

There were two predominant and widely understood mechanisms that led to a post-Brexit devaluation of the Pound Sterling against most other currencies. In fact, due to close pre-referendum polls that were, at points, even within the estimation-error bounds, the Pound Sterling was undervalued for a hypothetical Remain decision leading up to the 23rd June vote. These two mechanisms are similar: firstly, there is a normative (negative) value regarding uncertainty of a Brexit vote. Secondly, the more tangible threat of a preclusion from the world’s largest single market also leads to investment and trade concerns.

 

International and domestic investment is promoted by the Single market due to the free movement of people, capital, goods and services, in addition to a common set of laws under the arbitration of one, Court of Justice of the European Union. Whilst the ‘value’ of a Brexit is not something our analysis can capture due to the personal and individual nature of a vote within an in-out referendum, it is undeniable that the short and medium-term concerns in the absence of a concrete post-secession trading and passporting arrangement will cause speculation against the Pound.

 

Many of these effects generate further pressures that will devalue the currency. For example, the reduction in foreign direct investment or domestic investment due to uncertainty or deliberate flight derived from the tangible cost-benefit analyses regarding the future loss of access to a single market can potentially ruin the exporting capacity of an economy. Moreover, the current account deficit that the UK runs may no longer be financed by capital inflows. Therefore, whilst the exchange rate may make British goods appear more competitive, the performance of the economy may deteriorate. Exports must necessarily be financed by external capital flows into the domestic, British, economy. Therefore, should the automatic stabilising force be precluded from functioning, the Pound will struggle to recover and its devaluation exacerbated.

 

Having produced an analysis of a post-Brexit Sterling devaluation, the second part of this article seeks to understand whether Sterling’s present value is derived from a correction of the negative, post-referendum, currency effects. This in turn will inform our a conclusion in favour of, or against, further hedging based upon whether the value is likely to be sustained or short-lived.

 

 

BoE Carney Speaks to IMF

Discussion and Analysis by Charles Porter:

 

 

Last week, the minutes published following the Monetary Policy Committee’s Decision rallied the pound sterling. This event triggered an appreciation of the Pound Sterling contributing to intraweek gains in excess of 3 percent. Moreover, the Hawkish conclusion delivered by Gertjan Vlieghe, a traditionally Dovish Committee member, signalled a sooner-than-expected rate hike that in turn cemented and developed these gains. However, Carney’s speech today was unable to re-value Sterling.

 

The analysis of Gertjan Vlieghe’s speech reveals that markets reacted strongly to the following inclusion:

 

 

“If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in Bank Rate might be as early as in the coming months.”

 

 

The above quotation conforms almost perfectly to the minutes of the Monetary Policy Committee’s minutes-guidance. Sterling appreciated on the back of this speech because it demonstrated Committee-wide concurrence even amongst the more hike-averse members. Therefore, should Carney place more emphasis to an imminent hike or deliver a more Hawkish conclusion, then a further appreciation should be expected to prevail. However, presumably, so long as Carney did not deliver an outstandingly Dovish message, Sterling should maintain its gains and price out any risk of intra-Committee disagreement.

 

Mark Carney, Governor of the Bank of England, delivered a speech to the International Monetary Fund this afternoon at 16:00 BST. Although offering an abridged version to the Fund and their guests, the full publication was available at 4pm and thus currency market movements after this time should reflect, at least in part, Carney’s speech.

 

Validating the above expectations, Carney did side with the Monetary Policy Committee, suggesting that:

 

 

“As the Committee stated last week […] some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target.”

 

 

However, the Pound Sterling did not appreciate at all against other currencies, including the Euro and the Dollar. This may perhaps be because Carney did condition against this conclusion:

 

 

“Any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent[…]”

 

 

Therefore, if markets had, arguably unreasonably, predicted a stronger monetary policy tightening, Carney’s words may have cased investors to sell off the currency. This is because the gains that they anticipated, which derive directly from a higher interest rate, may not be realised. Ultimately, the next monetary policy Decision at the beginning of November will prove, or disprove, the Committee’s intentions to raise interest rates.

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The Week Ahead

Discussion and Analysis by Charles Porter:

 

The week that is now behind us has been eventful and tumultuous. One overarching characteristic was a bullish Pound Sterling. Driven by statistics releases and central bank activity, the Pound finished the week trading at its strongest rate against the US Dollar since 23rd June 2016. The intra-week gains for the Pound stand at around 3%. Looking ahead, we await to see whether Mark Carney shares the hiking-sentiment of the rest of the Committee, the Federal Reserve Bank’s Rate Decision and the result of the German general election.

 

Tuesday began the Pound’s rally, when Sterling jumped by around 0.5% within most currency pairs. The leap was caused by above-expectation and strongly above-target inflation statistics, as measured by the Consumer Price Index, released by the ONS. Despite representing a weakness of the currency in terms of the purchasing power of goods, the currency gained strength as markets priced in a higher probability of an interest rate hike.

 

Sterling was raised higher against both the Dollar and the Euro following the publication of minutes from the Bank of England’s Monetary Policy Committee on Thursday. Whilst these minutes confirmed a relative consensus against a rate-hike, they did also signal the willingness of the Committee to raise interest rates in the near future should current trends persist. This message was then confirmed by Committee member, Gertjan Vlieghe, in a hawkish conclusion that rallied the Pound.

 

Similar upside risk will manifest itself on Monday afternoon of next week when the Bank’s Governor, Mark Carney, speaks at the International Monetary Fund. Should Carney confirm, or even accelerate, the Committee’s intention to raise interest rates in the near future, then Sterling should gain an even firmer stronghold. However, the corollary is also true, should Carney establish a more Dovish tone, the expectation-induced currency gains may be eliminated and even reversed.

 

Perhaps more importantly, Wednesday will see the Federal Reserve Board decide upon interest rate targets within the United States. Whilst a tightening of monetary policy through the avenue of interest rates seems highly unlikely, a plan for curtailing the asset purchase program, quantitative easing, could well be forecasted. Therefore, considerable upside risk may similarly exist within the Dollar, providing the potential to arrest its year-to-date slide within major currency pairs. Clarifications of the Board’s monetary policy positioning should be availed through numerous conferences and speeches by Members.

 

Not wanting to be left out, Mario Draghi will also speak in Frankfurt. The ECB President’s last two speeches at the Nobel Laureate Meeting, Lindau, and then Federal Reserve Bank, Jackson Hole, have secured strong and lasting gains for the Euro. We will therefore await to see whether the content and normative message within Draghi’s speech can solidify this trend and send the Euro back to its monthly highs.

 

Perhaps most importantly of all, Germany will hold its general election on Sunday. The resulting Chancellor, decided within the second vote on the ballot, will be critical in determining the path of European integration and Eurozone completion. The political economy of Europe, given Macron’s presidency in France, could paint an optimistic picture for virtuous integration. Therefore, towards the end of the week, all eyes will be turned towards the German election.

 

 

Early Morning UK Trading

Discussion and Analysis by Charles Porter:

Sterling has opened high once again this morning. Since the start of the month, sterling has gained value, now reaching the highest rate against the Dollar for over one year. Sterling now trades around the value it did in the immediate aftermath of the Brexit decision. We analyse why and whether this is sustainable, grappling with the early morning trading prospects of today.

 

Sterling rose strongly across the board yesterday on the back of lofty inflation statistics. We published a two-part article examining the relationship between exchange rates and inflation with particular attention to the dynamics behind Sterling currency pairs. Whilst the revaluation of Sterling is logically explicable, its longevity must be questioned, at least for the immediate future.

 

The inflation rate spurred an increase in Sterling-based exchange rates in anticipation of the emergence of a more hawkish monetary policy decision from the Bank of England on Thursday. However, an obstacle to a more divisive or even hike-favouring vote will arise today. Later this morning, UK employment statistics will be released. Crucially, average earnings and the rate of wage growth will be discernible from the data.

 

The Bank is unlikely to vote in favour of a rate-hike if wage growth remains low. This is because the real income of UK citizens would likely be suppressed further, generating a headwind over the short-medium run for employees and consumers alike. Therefore, price inflation concerns may be subdued given that the rest of the macroeconomy is not performing well.

 

This morning’s statistics release will therefore contain the propensity for a development of the revaluation, or, a deterioration of the recent value that Sterling has gained. If wage growth statistics paint a pessimistic picture of the UK labour market then gains within the Pound will be eroded. In this scenario, the market would revise the future probability for monetary policy tightening downward, weakening the Pound.

 

If wage growth is strong, the CPI inflation statistics released yesterday gain further bite in their capacity to indicate the need for a monetary policy tightening. Within this scenario, Sterling’s gains would be bolstered and enhanced. There is considerable upside risk being attested to within wage and employment data which, if verified, will lead to an intraday revaluation of Sterling based exchange rates. If the transparent decision tomorrow does not verify this market impression then all gains made yesterday (and perhaps today) will be eliminated.

 

Ultimately, a lack of confidence in a rate hike tomorrow is what we believe is pragmatic and realistic. However, it is plausible that even one more vote endowing the support for a rate hike is enough to sustain, if not improve, Sterling’s gains. Given recent speeches of Monetary Policy Committee members in favour of an immediate 25bp hike, we can confidently assert that the specific development of the macroeconomy ensures their continued support for a tightening tomorrow. With this in mind, we look towards the employment data releases and monetary policy decision with scepticism.