Sterling
Sterling suffered further losses yesterday as private investors raced to purchase UK debt in anticipation of further quantitative easing from the Bank of England. Comments from policymakers suggest that the BoE’s aggressive new stimulus package will be enhanced in due time – so long as the domestic economy does not perform significantly better-than-forecast.
This has already had the effect of driving the yield on UK Treasury debt down to record low levels and suggests that Gilt yields will fall further over the next few months. Investors are reacting to, and exacerbating, this phenomenon by purchasing lots of UK debt before it begins paying out even less.
The upshot of this downward spiral is that speculative investors are selling assets denominated in Sterling because the profit yield on these investments is currently very low, and expected to get even lower.
Euro
The Pound to Euro exchange rate plunged half a cent to a new monthly low yesterday as overseas traders continued to treat the idea of investing in Sterling with little optimism.
The reality of record low returns on Sterling-denominated assets married with the rational fear of these returns reducing in the future means that the Pound is liable to remain under pressure for some time to come. Although GBP/EUR is now hovering around 50 pips above the post-referendum three-year low, there is little to suggest that Sterling will be able to rise from these levels anytime soon. Three-year lows are in touching distance and five-year lows are only a further two cents down the line.
US Dollar
‘Cable’ grappled with significant psychological and technical support yesterday as spiralling UK debt yields deterred investment.
Whether prudent or otherwise, the surge in Federal Reserve rate hike bets which followed last Friday’s bumper non-farm US labour market report, have pretty much collapsed in the ensuing days. This lack of hawkish sentiment has weighed on the US Dollar, suggesting A) GBP/USD has not suffered as steep losses this week as it could have done, and B) the Pound to US Dollar exchange rate could well depreciate again over the coming weeks if US rate hike bets gain more momentum.
The key to Fed speculation is likely to be Chairwoman Janet Yellen’s speech at the Jackson Hole Summit at the end of the month.
Canadian Dollar
The Pound slumped by another cent against the surprisingly resilient Canadian Dollar yesterday. The ‘Loonie’ remains one of the best performing currencies this year despite a raft of factors that would suggest otherwise.
Granted analysts have no quibbles with the Canadian Dollar’s 37-cent appreciation against the Pound this year. But the ‘Loonie’s’ strong performance against the rest of the majors is puzzling, considering oil prices remain depressed, the nation’s trade deficit is currently running an all-time high of CS$40 billion, unemployment is rising and Canadian interest rates have been slashed close to record lows.
Australian Dollar
Sterling weakened by around 130 pips yesterday to hit a new two-and-a-half-year low against the Australian Dollar yesterday as negative sentiment continued to plague the UK currency following the June 23 ‘Brexit’ referendum.
New Zealand Dollar
GBP/NZD tumbled by around three cents yesterday even though the Reserve Bank of New Zealand opted to cut interest rates from 2.25% to 2.00%. The RBNZ struck a doggedly dovish tone, suggesting that further rate cuts were likely and explicitly calling for a lower exchange rate. However, markets did not oblige and the high-beta ‘Kiwi’ rallied following the announcement, possibly because traders had feared a larger reduction in the base rate.
Data Released
13:30 USD Initial Jobless Claims (AUG 6) Medium 265k