Headlines
- Sterling volatility expected after EU vote – UK trade deficit narrows unexpectedly.
- GBP/EUR up 70 pips – Draghi calls on Eurozone leaders to reform.
- ‘Cable’ weakens half a cent – GBP/CAD flat.
- ‘Kiwi’ holds gains – ‘Aussie’ slides a cent.
Sterling
Despite data showing that Britain’s trade deficit unexpectedly narrowed in April, the Pound weakened versus some of the majors yesterday as ‘Brexit’ fears continued to plague Sterling.
The latest odds from gambling firm Betfair suggest that the chances of a vote to leave the EU have fallen from 28% to 22% this week, but that was not enough to stop investors hedging against falls (and rises) in the Sterling exchange rate following the June 23 referendum. The cost to insure against Sterling volatility rose to seven-year highs yesterday as traders sought to protect themselves from large swings in the currency and this caused the Pound to weaken against some of its most-traded currency peers.
Euro
It was reported yesterday that the UK trade deficit fell by around £0.1 billion in April as exports outpaced imports. The 11.2% jump in goods exports was the largest monthly gain since records began in 1998, while the £0.9 billion rise in exports to the EU marked a 10.3% improvement in this segment over the year. The upbeat trade report was not enough to lift the Pound against many of the majors but it did contribute to a positive day on the currency market for GBP/EUR, which rallied by around 70 pips.
Across the channel in the Eurozone, European Central Bank President Mario Draghi urged leaders to press ahead with structural reforms to help offset an expected deceleration in growth. High unemployment in the currency bloc is one of the lasting legacies of the financial debt crisis and Draghi spooked markets by predicting that Europe could suffer further economic damage if reforms are not enacted soon.
Monetary policy will not fix the crisis alone, Draghi stated. Basically a case of ‘I’ve done my bit, now it’s your turn’ from the ECB chief.
US Dollar
Sterling depreciated by around half a cent against the US Dollar yesterday as the high cost of insuring against movements in the UK currency weighed on potential investors.
The ‘Greenback’ benefitted from a lower-than-expected jobless claims figure of 264,000, which went a little bit of the way to healing the wounds from last week’s terrible non-farm labour report.
However, it seems that the Pound’s losses were related to ‘Brexit’ jitters on a day when both the US Dollar and the Japanese Yen rallied across the board. The ‘Greenback’ and the Yen are both considered safe haven currencies and their strength is often a sign that confidence is low in financial markets. When confidence is low, traders tend to avoid uncertainty in favour of solid investments and the upcoming EU referendum is arguably the biggest source of uncertainty to investors in 2016. So, it stands to reason that the Pound will weaken against the US Dollar and the Yen during times of risk aversion – and that’s exactly what happened yesterday.
Canadian Dollar
The Pound to Canadian Dollar exchange rate remained flat for most of yesterday’s session despite oil prices stalling after a three-day rally.
On Wednesday crude closed for the day at the highest level since July 2015 but the value of ‘black gold’ softened half a cent during yesterday’s session. However, it was not enough to lift the Pound against the commodity-sensitive ‘Loonie’. We could see Sterling push ahead this afternoon though if data shows, as expected, that Canadian unemployment rose form 7.1% to 7.2% in May.
Australian Dollar
The Pound managed to rally by around a cent against the Australian Dollar yesterday amid a global mood of negative risk sentiment. Although EU referendum fears overshadowed positive British trade figures, slumps in global stocks and commodities prompted traders to pull out of investments in volatile asset classes such as the ‘Aussie’ Dollar.
New Zealand Dollar
Following a stupendous five-cent gain on Wednesday, the New Zealand Dollar managed to hold steady against Sterling during yesterday’s session. Risk aversion trends compromised demand for other high-beta currencies but the feel-good factor surrounding the ‘Kiwi’ remained following the Reserve Bank of New Zealand’s decision not to slash interest rates in June.
Data Released
09:30 GBP BoE/TNS Inflation Next 12 Mths (MAY) Medium 1.8%
13:30 CAD Unemployment Rate (MAY) High 7.2%
15:00 USD U. of Michigan Confidence (JUN P) High 94.5