Sterling
UK Prime Minister David Cameron waded in on the ‘Brexit’ debate yesterday with a speech at a car manufacturing plant in Cheshire. The pro-EU PM stated that the uncertainty – regarding jobs, trade tariffs, new trade deals and demand for exports – of leaving the 29-nation bloc was far too high to risk voting to leave in June. He urged voters not to swap the ‘certainty of success for the uncertainty and risk’.
Cameron went on to state that, because Britain sends 50% of its export goods to the EU and only buys in around 7% of the EU’s total produce, UK negotiators would not be able to guarantee a good deal in the event of a ‘Brexit’.
Euro
Q: When is the kitchen sink not enough?
A: When, after chucking it, you tell everybody you have nothing left.
European Central Bank President Mario Draghi is likely a very unhappy man this morning. After months of deliberating the central banker decided to go all out and introduce aggressive stimulus measures to try and weaken the Euro yesterday.
Draghi shocked markets by cutting the benchmark interest rate from 0.05% to zero, reducing the deposit rate from -0.30% to -0.40%, cutting the overnight rate from -0.25% to -0.30% and, most sensationally, raising the monthly asset purchasing target from €60 billion to €80 billion. This significantly surpassed economists’ stimulus expectations.
The Euro depreciated initially in reaction to the extremely dovish policy announcement. This is what Draghi wanted to happen because, theoretically, a softer domestic currency will help make imports more expensive and therefore drive consumer prices higher.
However, something went awry soon after that when the ECB Chief noted that there would be no further interest rate reductions. Markets saw this as a reason to buy the Euro and subsequently the impact of Draghi’s actions were reversed.
GBP/EUR rose by around 120 pips through significant psychological resistance when the ECB announced the new easing measures but dropped by around -250 pips when Draghi admitted he had nothing left.
US Dollar
Sterling rallied by over a cent to strike a new 20-day high against the ‘Greenback’ yesterday afternoon.
Investors sold the Dollar against the Euro in response to Mario Draghi’s announcement that there would be no more rate cuts from the ECB and this translated into negative demand for the ‘Greenback’ against the Pound too. EUR/USD is the most liquid currency pair and subsequently large moves often seep through into other EUR or USD crosses.
With GBP/USD rallying above a key resistance level there is potential for further gains if British sentiment remains buoyant. However, additional ‘Brexit’ related volatility could easily put pressure on the Pound and drive ‘Cable’ lower.
Canadian Dollar
The Pound to Canadian Dollar exchange rate shot up by almost 250 pips yesterday afternoon as hopes of further easing measures from the ECB were dashed by central bank Chief Mario Draghi, even though he had just released substantially more stimulus than markets had hoped for.
The risk-correlated ‘Loonie’ also suffered as crude oil prices tumbled from a three-week high struck earlier this week.
Later this afternoon the Canadian unemployment rate is tipped to print at 7.2%. Anything higher could weigh on the Canadian Dollar while anything lower could bolster demand.
Australian Dollar
Sterling strengthened by around two cents yesterday as risk sentiment swung heavily following the highly awaited ECB stimulus announcement.
A strong message of intent from Mario Draghi saw the risk-sensitive ‘Aussie’ rally 120 pips initially but markets backtracked and piled back into the Pound in reaction to the ECB Chief’s assertion that rates would not be cut further in the future.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate is currently around five cents stronger than it was on Thursday afternoon.
First, the ‘Kiwi’ Dollar plunged four cents in response to the Reserve Bank of New Zealand’s surprise decision to slash interest rates. Then GBP/NZD rallied a cent thanks to the ECB’s signal that there would be no more stimulus.
Data Released
09:30 GBP Visible Trade Balance (Pounds) (JAN) Medium -£10300
09:30 GBP Construction Output s.a. (YoY) (JAN) Medium -1.7%
13:30 CAD Unemployment Rate (FEB) High 7.2%