• Pound down as major flooding continues – Worst floods since 2007 could deteriorate further.
• Spanish political impasse remains – Rajoy calls for Spanish unity, Socialists reject grand coalition.
• ‘Cable’ strikes new eight-month low – US consumer confidence rises.
• CAD up 180 pips on crude rally – GBP/AUD up 200 pips to six-month high.
Sterling
It was another tough day for the Pound yesterday as forecasts of further flooding dampened economic sentiment in Britain.
Large swathes of Northern England have been hit by heavy rainfall over the past week and with Storm Frank on the way some commentators fear that the floods could get even worse. With an estimated 6,700 buildings damaged it is predicted that the total economic impact of the storms could be over £5 billion. Though tragic, the damage to personal property caused by the storms does not affect GDP but factors such as businesses not being able to open, loss of agricultural output and reduced purchasing power are predicted to shave off around 0.25% of economic growth in 2016.
Euro
Sterling came close to striking a new two-month low yesterday but demand for the single currency was not strong enough to push GBP/EUR lower.
Spanish politics remained at an impasse as acting Prime Minister Mariano Rajoy called on his Socialist opponents and the centrist Ciudadanos to form a grand coalition to keep the nation unified and prevent a Catalonian independence referendum. However, the Socialists reiterated that they would not under any circumstances back a government led by Rajoy’s People’s Party. But analysts are sceptical as to whether the pro-unity Socialists would be able to pair up with leftist Podemos, because Podemos support a Catalonian referendum.
Spanish bond yields haven’t risen much in response to the political uncertainty, which shows that investors are not overly concerned that radical leftist Podemos will get into power. But while things are still shrouded in uncertainty there is always a fear that Spain could be pulled into a tug of war between anti-Euro politicians and European officials – à la Greece under Syriza – and as such speculators are slightly anxious of investing too heavily in the single currency.
US Dollar
The Pound to US Dollar exchange rate tumbled to a new eight-month low yesterday as UK flood warnings weighed on British economic sentiment and decent US consumer confidence figures bolstered 2016 Federal Reserve rate hike bets.
The latest American consumer sentiment figures showed that confidence rose from a revised 92.6 to 96.5 in December, which boosted demand for the ‘Greenback’ because analysts were primed for a softer score of 93.5. The upbeat figure helps keep hopes alive of the Fed raising rates by another 100 basis points over the next 12 months. The US central bank currently projects 100 basis points of hikes but markets have only priced in half that much.
Canadian Dollar
A rebound in crude oil prices helped lift the Canadian Dollar higher by around 180 pips against the Pound yesterday. GBP/CAD plunged to a three-week low as the embattled oil market saw prices rally almost 3% ahead of data predicted to show that US crude inventories fell by -1.5 million barrels last week. Although the end to a 30-year US crude export ban and the end of Iran’s sanctions could flood the market with a glut of supply next year some speculators are hopeful of a rebound.
The bulls cite an index that tracks the worst 18-month periods for crude, which shows that on 98% of occasions when oil has declined -40% over 18 months it has rebounded by an average of 42% the following year. However, every situation is different and correlation never implies causation.
Australian Dollar
Sterling sunk -200 pips against the Australian Dollar yesterday to reach a six month low in thin holiday trade as flood damage threatened to weaken British economic output in the New Year. Market moves were particularly volatile due to the low volumes of trades and this allowed the ‘Aussie’ to rally strongly without any significant positive domestic drivers.
New Zealand Dollar
The Pound also tumbled to a fresh six-month low against the New Zealand Dollar, depreciating by around -130 pips, as negative British sentiment dragged GBP/NZD lower.