Cable finds some support after Johnson-shock
After some vicious selling at the beginning of the week, the pound found some support just below 1.40 versus the US dollar. True the pair dipped to as low as 1.3878 – a new 7-year low- in the aftermath of London Mayor Boris Johnson’s announcement that he was backing the ‘Leave’ campaign. The pound subsequently emerged back above 1.40 by Friday after spending Wednesday and Thursday below that key psychological level.
The issue of Brexit will be one that will weigh on the pound until the uncertainty is lifted after the referendum. There will certainly be a volatility until the issue is settled for good, while a ‘leave’ vote will introduce an even longer period of uncertainty until the UK and the EU finalize the terms of their ‘divorce’. Most analysts however are predicting a victory for the ‘stay’ camp and polls conducted by telephone are also pointing to the same direction. Some online polls on the other hand are pointing to a ‘Brexit’ but given the economic uncertainty such a move would entail, voters might be swayed to vote ‘remain’ despite widespread Euroscepticism in the country about Brussels and certain aspects of the European Union.
The recent Scottish independence referendum in 2014 was another case in which voters chose to remain with the status quo rather than perhaps listen to more nationalist arguments and make a leap into the unknown. However that particular referendum was closer than many had anticipated and some polls beforehand showed that Scottish independence was a very realistic prospect. Another recent referendum where voters were expected by markets to do the ‘sensible’ thing was the Greek referendum of July 2015, but there were surprises in that case. To sum up, every political process can throw up surprises – particularly in recent years – but given what is known until now, Brexit will probably be avoided.
Stocks outside China gain as oil stabilizes
Some sense of stability returned to global stock markets this week as major markets managed to resist the bears and closed in positive territory. Particularly crucial was Wednesday’s Wall Street session when the S&P 500 managed to resist an attempt to drive it below 1900, managing instead to close higher on the day. Thursday’s trading was equally important, as a more than 6% drop in the Shanghai Composite in China did not cause panic in other markets, as they instead managed to close higher.
The price of oil also managed to overcome a powerful wave of selling on Tuesday, managing to hold the $30 a barrel level (for NYMEX WTI) and climbing above $33. Oil has traded below $35 since January 6 this year. It is worthwhile noting that the S&P was trading above 2000 on that day, which points to the close attention that other markets have been paying to what has been happening to the oil market. For example the stronger oil price helped the Canadian dollar, which has been a victim of the oil price weakness, as it rebounded to a 2 ½ -month high versus the greenback around 1.35.
Again, there was some selling of safe haven assets such as gold and the Japanese yen, but nothing that suggests that sentiment has shifted to a more positive outlook. Most investors are probably still on a sell-on-rallies mentality for stocks. Major currencies apart from sterling which has been on a rollercoaster ride for its own reasons, have been in well-defined ranges against the dollar, which seems to be waiting for the monetary policy outlook to become a little clearer before making its next move.
The resilient commodity currencies: the aussie and the loonie
Both the Australian and Canadian dollars have also been helped by the recent recovery in oil prices and risk appetite. After the aussie dipped to 0.6826 on January 15, it managed to rally up to 0.7250 lately. A recovery in iron ore prices, Australia’s main export, also helped the aussie as did a sense that China’s problems were substantial but under the authorities’ control. In the loonie’s case, the US dollar climbed to just under 1.47 on January 20, but the recovery of the oil price drove USDCAD back to around 1.35. Shorting the commodity currencies probably became an overcrowded trade and the unwinding of these positions has helped these currencies to retrace a substantial part of their losses.
As the two currencies are sensitive to commodity price swings, it is perhaps too early to say that their fortunes have now turned positive. As long as commodity prices are under pressure it will be difficult for the two currencies to have a sustainable upswing. But recent price action was welcome in the sense that extremes in sentiment should often be cleansed by counter-action in the opposite direction.
Risk Warning: Forex, Commodities, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you fully understand the risks involved and do not invest money you cannot afford to lose. Please refer to our full Risk Disclosure.