Sterling
The Pound continued to depreciate yesterday as traders reacted to a leaked Treasury report suggesting that British GDP could fall 5.4%-9.5%, and tax revenues could decline by up to £66 billion, over the next 15 years as a direct consequence of ‘Brexit’.
A report from Russian bank VTB indicating it was planning to move European operations to Frankfurt also weighed on British sentiment and contributed to a slide in Sterling’s trade-weighted index to a fresh eight-year low. And to make things worse, new Bank of England policymaker Michael Saunders said that he would ‘not be surprised’ if the Pound weakened further and claimed the BoE was willing to look through a currency-driven rise in inflation. Saunders’ comments suggest that the UK central bank would not raise rates to support the domestic currency unless CPI was seen rising above 3.5%.
Euro
The Pound to Euro exchange rate tumbled by a further half-cent yesterday as ‘hard Brexit’ fears reigned over the UK currency.
Following news that Russian bank VTB was planning to move headquarters to Europe, two other major bank bosses warned of similar consequences. James Bardrick, head of Citibank UK, said he could start moving operations across the Channel as early as the ‘first quarter of 2017’, while Bob Rooney, CEO of Morgan Stanley, stated that ‘lots of the things we do today in London’ would have to be relocated if the government did not commit to long-term access to the single market.
Data from Europe showed that German investor sentiment rose from 5.4 to 12.3 at the start of October, which also boosted the single currency against the Pound.
US Dollar
‘Cable’ plummeted by a further -150 pips yesterday as a toxic combination of ultra-low confidence in the Pound and hopes of a Federal Reserve rate hike sent GBP/USD tanking.
The Pound’s recent depreciations, the worst four-day performance since the days following the EU referendum, are unlikely to be reversed anytime soon due to the British government’s plans to pursue a so-called ‘hard Brexit’ outside of the single market. Indeed, ‘Brexit Secretary’ David Davis admitted yesterday that he saw advantages to the Pound’s decline, suggesting that government ministers will not be changing their policy in order to prevent further Sterling falls.
The US Dollar, meanwhile, was bolstered by hopes that the Fed will hike rates in December. Market futures rates now suggest a 70% chance of a rate rise in December, up from 66% last Friday. Later this evening we will find out in more detail how Fed officials felt about monetary policy in September. However, the September meeting minutes are unlikely to provide any large surprises as a thorough statement was released at the time.
Canadian Dollar
Sterling’s value dropped by around -120 pips versus the Canadian Dollar yesterday. It was a mixture of ‘hard Brexit’ anxieties and hopes of a global oil production deal that drove GBP/CAD’s decline. Russian President Vladimir Putin recently threw his support behind OPEC’s plan to curb oil production in November. The coordinated action is aimed at driving crude prices higher. However, despite Putin’s encouraging remarks, Russia’s most influential oil executive Igor Sechin said his company would not alter its production levels as part of an agreement with OPEC. The hiccup hurt oil prices, but did not effect GBP/CAD.
Australian Dollar
The risk-correlated Australian Dollar suffered at the hands of the US Dollar yesterday, as Fed rate hike bets rejuvenated demand for the ‘Greenback’. However, the trend of ‘Aussie’ Dollar weakness did not extend to GBP/AUD, which tumbled by around -80 pips on the day.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate yo-yoed up and down yesterday but ultimately ended for the day close to where it began. Sterling managed to avoid any significant losses against the ‘Kiwi’ because Reserve Bank of New Zealand Assistant Governor John McDermott stated that ‘further policy easing will be required’. The dovish remarks meant it was not a clean sweep of steep losses for the Pound yesterday.
Data Released
10:00 EUR Eurozone Industrial Production w.d.a. (YoY) (AUG) Medium 1.0%
19:00 USD U.S. Fed Releases Minutes from Sept. 20-21 FOMC Meeting Medium