From the Floor: May's 'hard' Brexit puts City in firing line
- Theresa May Brexit process move for end-March could hurt UK banks — Garnry
- City under threat as 'unbelievable' PM pledges no special treatment — Garnry
- Sterling clattered to below 1.28 as hard landing prospect grows — Norup
- One-month GBPUSD move up one vol as sterling 'very bid' — Norup
- USDJPY could be ready for breakout after Kuroda comments — Moltke-Leth
- Gold homing in on $1,300/oz on Fed, dollar, Clinton triple whammy — Hansen
- Oil follow-through could make Brent a sell at $51/barrel — Hansen
By Martin O'Rourke
London's City may be the crown jewel of the UK economy, but as we continue to absorb prime minister Theresa May's pledge on Brexit this weekend, there is much for the square mile to fear.
"The UK PM has come out and said that they will not treat the City any differently to other parts of the UK economy when it comes to the talks on Brexit," says Peter Garnry, head of equities strategy at Saxo Bank. "The City is so important for the rest of the UK economy that it seems almost unbelievable that this is really May's stance as we move closer to the Article 50 trigger."
Garnry, speaking on the Daily Morning Global Call, wonders whether May will actually follow through on what she said, but warns that "there could be a lot of noise around UK banks, especially the large investment banks operating out of London."
Sterling has certainly taken fright this week and resides well south of the 128.0 handle after May's Brexit bomb this weekend. GBPUSD was at 1.2777 at 0655 GMT.
Sterling on a road to sub-128.0
One-month GBPUSD vols have subsequently shot up one percentage point on the back of a spike in volatility. "Sterling vols are trading very bid after the comments from May on Brexit," reports Jeppe Norup, from the Copenhagen-based FX Options desk. "Forcing the Brexit before March is risking the economy having a harder landing than was initially anticipated."
Sterling is not the only currency under fire with Japan's yen also looking potentially weaker in the light of the Bank of Japan governor Haruhiko Kuroda's comments overnight that "negative rates are an overall plus for the economy," as reported by Christoffer Moltke-Leth from Saxo Bank's Singapore hub.
"USDJPY extended gains above 102.30 before finding some resistance," says Moltke-Leth. "If we look at the weekly chart, it does indicate a breakout of the long-term downward channel and we also see the relative support indicator looking well supported there."
According to Moltke-Leth, this is premised on the possibility of yet more negative rates to come as Japan looks to pull its way out of the deflation quagmire.
USDJPY was at 102.38 at 0655 GMT.
USDJPY breaks above 102.30 before finding resistance
Gold is facing a near-term crunch as the precious metal faces a likely challenge of the $1,305-00/oz zone on the back of a strengthening dollar, the increased likelihood of a rate hike this year after a strong US ISM Monday raised the prospect of a Fed move to 61%, and an increased lead for Democrat nominee Hillary Clinton over her Republican rival Donald Trump in the race for the White House.
"Gold is being dragged to the edge rather than pushed," says Saxo Bank's head of commodities strategy Ole Hansen. "The market hates uncertainty, especially gold, and it is being dragged ever lower."
Silver lead the precious metal slump Monday falling below $19/oz and platinum was also testing the 200-daily moving average at the $1,002.60/oz level.
"We haven't really broken anything yet but the market is looking for the reaction if we take out the $1,300/oz low so that we can see what underlying demand there is for gold as we're still stuck in this range," says Hansen.
Gold could be set to test $1,300/oz on a triple whammy headwind
Oil too could be facing its own test in the next few days as the rally since last week's face-losing production cut deal on the part of the Saudis nears the likely upper limits of the range as Brent crude pushes to $51/barrel.
"Once the market starts to settle down, it will start to reflect on what's out there in terms of news," says Hansen. "Libya and Iran will continue to increase exports and the inventory report tomorrow is expected to rise for the first time in five weeks."
"in order for this deal from last week to work, they need Russia to cut production," says Hansen. "That will be the focus over the coming weeks especially when production is rising in countries that are exempt."
Hansen suggests keeping a close eye on $51.50/b in Brent for a potential sell level.
The Reserve Bank of Australia chose overnight to keep rates as they are with a minimal impact on AUDUSD given the decision was largely expected.
"The Sydney housing market is extremely buoyant and this alone would legislate against further cuts for now," says Moltke-Leth. "AUD has fallen marginally but there has been a much bigger move in 10-year yields."
Martin O'Rourke is managing editor at Saxo Bank
Editor’s note: From the Floor takes advantage of TradingFloor.com's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.