• Sterling slides more than 200 basis points after May's Brexit speech • Sterling at weakest for 'couple of months' as May signals likely EU exit — Hardy • USDCNH biggest two-day slide since June 2016 takes pair to just under 6.88 • Dollar back on track as nonfarm payrolls shows recovery on track • USDJPY rising, EURUSD needs to hold below 1.0450 for downside case — Hardy • NFP puts roadblock on gold rally with $1,161/oz support test likely — Hansen • Yields shift higher on the back of NFP, bunds out to 162 — Boye
By Martin O'Rourke
UK prime minister Theresa May perhaps did not mean it, but the fallout from her Brexit speech this weekend has sent sterling once more towards the edge Monday morning.
From a relatively lofty starting point close to the 1.24 handle, GBPUSD plunged some 200 basis points during the Asia session to slide beneath 1.22.
“Sterling is in its most defensive position for the past couple of months,” says John J Hardy, Saxo Bank’s head of forex strategy. “The move came on the back of May’s indications that it is extremely likely that the UK will leave the single market because of the so-called red lines of immigration and the European Court of Justice.”
“Sterling is collapsing to new lows and we’re going to be talking about 1.20 here and perhaps lower,” said Hardy, as the UK leader once again shifts towards a hard-Brexit platform.
May clatters Sterling towards new lows:
Sterling weakness is one thing, dollar strength is another and the latter has regained some of its chutzpah after a dig beneath the headlines of last week’s on-the-surface disappointment for the nonfarm payrolls showed the US recovery is on track.
“Average hourly earnings were the key and there is also a good chance that next month’s report will see more of a boost ,” says Saxo’s forex chief.
For now, most of that strength is playing out in GBPUSD and to a slightly lesser extent in USDJPY which has returned to the 117.00-plus area, but the follow through in EURUSD is yet to happen, notes Hardy.
“I think this is partly due to all the focus on GBPUSD,” he says, “but I’d like to see 1.0450 taken out before we can say the downside case is firmed up.”
“We’ve seen some tremendous squeezes back and forth. Bulls, if there are any, need to see this 1.0670 area give way, the 61.8% retracement.”
EURUSD bears will be looking for a break below 1.0450:
USDCNH, meanwhile, slid to its biggest two-day fall since June 2016 to just beneath the 6.88 mark after Beijing reported a $41 billion draw on its reserves for December, down from the $69bn figure for November.
“Reserves have got very close to the $3 trillion handle,” reports Ryan Wu from the Singapore hub. “This is the sixth-straight month of falls and it is very likely that we will go below that level next time.”
NFP may have been a boon for dollar but it’s provided little in the way of cheer for gold which is once again looking over its shoulder at that $1,173/oz zone.
“We got firmer US yields on the back of the NFP and that has taken a bit of the shine off gold,” says Saxo Bank’s head of commodities strategy Ole Hansen. “Gold is back at $1,173/oz but there is no particular interest to buy at these levels.”
“We might need to see gold test $1,161/oz.”
US-10 year Treasuries yields were once again back out to 2.4%, and bunds are out to 162, reports Michael Boye from the fixed income desk in Copenhagen, while Australian and New Zealand 10-year yields both shifted wider to 2.76% and 3.27%, Singapore-based Ryan Wu notes.
Gold nets fell for the eighth straight week to an 11-month low and is now down 88% from its July peak, notes Hansen. The silver-net long meanwhile has stabilised over the last three months and now rather unusually exceeds the gold position.
Elsewhere, oil is stuck in rangebound territory after the early year excitement with potential supply concerns over Nigeria offset by a rising US oil rigs count.
Italy’s slipped off the radar this past month since the Italian referendum defeat for prime minister Matteo Renzi, but it faces a stiff challenge this week if it fails ratings agency DBRS’ review test.
“All the major ratings agencies have put Italy to B status and if DBRS aligns with that, then we could have some big implications for Italy,” says Boye.
Sometimes it is just better to watch and observe. Photo: iStock