Sterling
Sterling struggled yesterday as a turbulent start to the week on financial markets exacerbated fears that Britain may vote to leave the European Union later this year.
UK Prime Minister David Cameron looks set to hold an in/out EU referendum this summer and with new polls giving the out camp a nine-point lead analysts are growing worried that business investment could dry up in the run up to the vote. The situation for Sterling was worsened by a global selloff in stocks and shares, which saw Wall Street fall -2% and European indices sink to their lowest level for 16 months.
This morning’s trade data is unlikely to help the situation, with forecasters expecting the visible trade balance deficit to increase by another £10.4 billion.
Euro
The Pound to Euro exchange rate tumbled by around -120 pips to strike a fresh 13-month low yesterday as a combination of ‘Brexit’ fears and risk aversion flows worked against Sterling.
Although the Pound is generally viewed as a safe haven currency, the uncertainty surrounding the upcoming EU referendum means that traders are dubious about placing their funds in UK investments. Just last week Citigroup announced that British GDP could shrink -4% and the Pound could depreciate -15-20% in the immediate aftermath of a vote to leave the 28-nation bloc.
The other factor weighing on GBP/EUR was the market wide theme of negative risk sentiment, which persuaded traders to pull out of perceived riskier investments. Because many of these perceived riskier investments were taken out with funds obtained cheaply from Europe, the return of these funds had a significant positive impact on the single currency.
US Dollar
Sterling sunk by a cent against the US Dollar yesterday as a more traditional safe haven dynamic played out in favour of the ‘Greenback’.
As the world’s premier reserve currency the US Dollar often absorbs defensive inflows during times of crisis because investors know that there is no other currency with as stable an outlook as the ‘Greenback’. Regardless of whether or not Federal Reserve chief Janet Yellen opts to talk up further interest rate rises in 2016 or not this week, the world’s business currency looks set to remain steadfast against Sterling so long as markets remain in risk off mode.
‘Cable’ reached a one-week low yesterday but seven-year lows remain in sight if market sentiment continues to weigh against the Pound.
Canadian Dollar
The Pound’s poor form extended to GBP/CAD yesterday. Sterling depreciated by around a cent on ‘Brexit’ concerns, even though the stock market pummel would be expected to weigh on the risk-correlated Canadian Dollar. It seems that a surprisingly decent set of housing market figures gave investors enough reason to buy into the ‘Loonie’: building permits beat estimates of 6.2% with a whopping 11.3% expansion.
Australian Dollar
The Australian Dollar also got in on the act yesterday, registering a 50 pip gain against the Pound on a torrid day for the UK currency.
However, we could see Sterling make back ground against the commodity bloc later in the week if Fed President Janet Yellen opts to talk up the prospects of further rate rises from the US central bank in 2016.
New Zealand Dollar
The New Zealand Dollar also gained ground – 50 pips – against the Pound yesterday as sentiment towards the ‘Kiwi’ currency improved in reaction to remarks from Reserve Bank of New Zealand Governor Graeme Wheeler suggesting that rates will not be slashed during 2016.
Data Released
10:00 EUR Euro-Zone Unemployment Rate (NOV) Medium 10.7%
10:00 EUR Euro-Zone Retail Sales (YoY) (NOV) Medium 2.0%
13:10 CAD Bank of Canada’s Poloz speaks in Ottawa Medium