At the end of last week, a stronger USD pushed EUR/USD under the 1.1000 mark and GBP/USD sub 1.2300. GBP consolidated somewhat after a big drop the week before, SEK declined on a weak inflation print and ZAR was smashed as the ex-Finance Minister was confirmed as being summoned to court for misconduct whilst in government. We also saw the power of monarchy in a world that seems increasingly reluctant to embrace it – the Thai Baht sold off on news of the passing of the King, who is revered as divine by many, and a powerful force for stability in a sometimes torn nation.
It was a week when European bond funds saw huge outflows (36th consecutive week of outflows), as the view of Europe’s future remains under scrutiny after Brexit. There is talk about how / when / if the ECB will ‘taper’ its QE program. When this does start to happen, many expect a strengthening €, so watch this space for new direction from the ECB in the coming months.
With the Italian referendum, and German & French elections around the corner, we could soon see the € back as the driving force in FX.
The only light relief for GBP could be found at BNP Paribas, their economist saying “The real risk for GBP could be a rebound. It has fallen so much and investors are so short that it could well rebound on positive news”. This is of little relief to those caught in the recent “swift and brutal” sell-off!
According to the FT … FX is interesting!
Ø Currencies usually sit in the background, behind stocks, pensions, bonds and world events, but it’s difficult to ignore this year. Why is FX interesting this year?
Ø FX is reacting to political shifts:
“.. 3 of the 5 biggest gainers vs USD this year (Brazilian Real, Russian Ruble and South African Rand) have been driven by political change..” In turn, the 4 biggest losers are GBP, Argentinian Peso, Mexican Peso and Turkish Lira. The drivers of FX are not simply inflation, deficits and interest rate differentials!
Ø GBP/USD in 2016 has a 70% correlation to the UK banking sector (average correlation over the last 15yrs is 35%). GBP has depreciated 21% year-to-date and UK domestic banks are -30% in local currency terms. Thanks to the FT and Citibank research, this implies a decline in stock prices if GBP/USD declines
For those with concerns about the state of the world economy – do not dwell on the fact that nobody wanted to buy Twitter. Snapchat may IPO soon (I’m not sure what they do, but the name encapsulates the whole sector!), and the Saudi sovereign wealth fund is combining with Japan’s Softbank to create a $70 BILLION fund to invest in the technology sector. Time to put down your Samsung Galaxy Note 7 and read that Steve Jobs book you got last Christmas…..