Sterling volatility predicted –
Pound weakens across the board.
UK trade deficit rises –
Imports up, exports down.
GBP/USD plunges -2.5 cents –
Sentiment favours ‘Greenback’.
Sterling sheds cents vs. majors –
NZ currency intervention unlikely.
Sterling
The Pound depreciated against the majors yesterday as investors looked to hedge against the possibility of large swings in Sterling. After falling folly to unexpectedly sharp volatility in the build-up to last September’s in/out Scottish referendum, many traders are exercising more caution ahead of the general election this time out. The price to insure against sharp Sterling moves rose to its highest level since 2011 yesterday and this worked to weaken the Pound against its most-traded currency peers.
The fear is that, with no party looking likely to gain a strong enough majority to form a government, political uncertainty could reign following the election as politicians from the major parties as well as a number of smaller political organisations attempt to form a coalition. Following the 2010 election the Conservatives and the Lib Dems formed a coalition in just five days but negotiations are predicted to be more complicated and last for much longer this time around.
The Pound was also hurt by a worse-than-anticipated widening of the UK trade balance from a negatively revised -£9.2 billion to -£10.3 billion due to a rise in imports and a dip in exports – particularly to countries outside of the Eurozone.
Euro
The Pound set off on a downward path against the Euro yesterday as investors weighed up the prospect of enhanced Sterling volatility over the next few months. The single currency was also boosted by news that Greece made its latest payment to the IMF.
However, sentiment towards the single currency soured during the afternoon as markets digested news that Eurozone leaders have requested that Greece revises its latest reform package. The Hellenic nation’s creditors gave Greek policymakers six days to come up with an improved set of plans to raise funds and streamline the nation’s flagging economy.
This left GBP/EUR flat on the day.
US Dollar
Sterling plummeted by around two-and-a-half cents against the US Dollar yesterday to close to a five-year low as markets began to aggressively sell the UK currency ahead of next month’s general election.
Investors and analysts alike were unconcerned by the Bank of England’s latest policy announcement: that interest rates would remain at the record low of 0.50% through April, because the decision was so predictable.
Despite the Federal Reserve’s latest minutes report showing that some policymakers would like to wait until the end of the year to start raising interest rates, the large majority of traders now expect the Fed to begin its tightening cycle in 2015, most likely in September. This dynamic is boosting the appeal of the ‘Greenback’, especially against the Pound, which looks set for a haphazard few months as political concerns outweigh the recent surge in private sector output.
Canadian Dollar
The Pound to Canadian Dollar exchange rate succumbed to a sharp -1.7 cent daily decline yesterday as markets shunned Sterling ahead of what is predicted to be the closest general election in decades. The ‘Loonie’ did not have any reason to appreciate so it seems that the downward GBP/CAD moves were entirely motivated by negative sentiment towards the UK tender.
Later today Canadian unemployment is tipped to print at 6.8% for March, which is what it printed at in February and is therefore unlikely to have a huge impact on the domestic currency.
Australian Dollar
Sterling suffered a -2.7 cent depreciation against the Australian Dollar yesterday as a combination of UK general election jitters and a downbeat trade report drove investors to sell the Pound. Decent private sector output has led some analysts to predict that British GDP growth accelerated from 0.6% to 0.7% in the first three months of the year but other economic commentators point to the decline in exports as a sign that economic expansion could have decelerated in the first quarter. An initial estimate from the National Institute of Economic and Social Research (NIESR) is due for release this afternoon.
New Zealand Dollar
GBP/NZD weakened by over two cents yesterday on concerns that the Pound could fall subject to large swings in value during the upcoming British general election. The ‘Kiwi’ Dollar was also supported by comments from New Zealand Prime Minister John Key suggesting that currency market intervention would not work to boost competitiveness in the island nation.
Data Released Today
09:30 GBP Industrial Production (YoY) (FEB) Medium
09:30 GBP Manufacturing Production (YoY) (FEB) Medium
13:30 CAD Net Change in Employment (MAR) High
13:30 CAD Unemployment Rate (MAR) High