Article / 06 July 2016 at 8:04 GMT

FX Update: Sterling plunges through 1.3000 barrier for fresh lows

Head of FX Strategy / Saxo Bank
  • GBPUSD hits fresh 31-year low for sub-1.28 plunge
  • Political vacuum in UK puts blocks on implementing Brexit
  • Capital flight also appears to be gathering pace
  • GBPJPY also plunging for a "remarkable" sub-1.29 low
  • USDJPY homing in on key 100.0 mark on safe-haven flight
  • Dollar could eventually emerge as the "good" safe-haven of choice in Q3
  • Yuan devaluation provides threatening backdrop to post-Brexit crisis

The political vacuum in the UK is not helping sterling although Theresa May has
emerged as the clear frontrunner in the battle for the Conservative Party leadership
and de facto prime minister which is set to be decided by September 2. Photo: iStock

By John J Hardy

Sterling and yen were the polar opposites overnight with GBPJPY plunging to a remarkable sub-129 low, while GBPUSD touched 1.2800 and USDJPY poked toward the psychological 100.00 barrier.

EURUSD was weaker late yesterday as the single currency seems finally to be suffering collateral damage on the Brexit vote relative to the greenback. As I will argue in our upcoming Q3 outlook, the currency safe havens, should market conditions remain wobbly in coming months, will be the good (USD), the bad (EUR) and the ugly (JPY). The last of these is deemed “ugly” because of the rising risk of intervention with every tick lower in JPY crosses.

One of the latest drivers for the negative spiral in sterling appears to be capital flight from the UK property market, with three large funds halting redemptions. As well, the wait for what shape the Brexit takes will continue for some time as we won’t have new political leadership in the UK until at least September, with the mild pro-Remain Conservative Theresa May clearly leading the race to become the new prime minister after yesterday’s first stage of voting. 

As if we didn’t have sufficient horsemen on the ride at the moment, the yuan is galloping lower versus the US dollar  in recent days as China flirts with destabilising global markets even further if it accelerates the pace from here.

The clear driver of the last leg of the move is the USD strengthening as China ensures that the yuan is steadily falling against a basket of currencies regardless of the USD direction since early this year, so when the USD rallies, the yuan must weaken that much more.

Relative to the trade-weighted basket of currencies declared by China’s CFETS late last year, China has now carried out more than 7% of yuan devaluation. More to come.

EURUSD outside day reversal

EURUSD saw an outside day reversal yesterday, but still merely trades midrange as we watch for signs that the market prefers the greenback to the single currency as a safe haven.

Key tests of that notion are upcoming with today’s US June ISM Non-manufacturing survey and the Federal Open Market Committee minutes later. Friday’s US jobs report is the final test of the week. A weekly close below 1.1000 would keep the focus lower.

A close for the week on EURUSD of lower than 1.10 would keep the focus to the downside
 Source: SaxoTraderGO

The G-10 rundown

USD – the preferred safe haven at the moment apart from the dominant yen, though we’ve got to navigate the key US data this week, including the June ISM Non-manufacturing survey today and FOMC minutes later and especially the Friday payrolls and earnings data. We’ve yet to achieve a close below 1.10 in EURUSD.

EUR – The euro continues to rise versus sterling and the downside versus the US dollar has been relatively modest even if we’ve come well off yesterday’s highs. A close below 1.1000 offers a firmer sign that the USD is preferred versus the euro, and US data today and Friday likely to affect the action.

JPY – Bank of Japan governor Hiruhiko Kuroda has an opportunity tonight in the Asian session to apply the brakes to the yen freight train, but is it too early for this beyond the usual stern rhetoric? 95.00–94.60 is the next USDJPY technical level below 100.00+.

GBP – sterling devastation continues across the board on signs of capital flight from the UK property market and possibly on the 1.3000 barrier giving way overnight, judging from the price action. The chart is stretched very hard and the downside could continue apace, but it wouldn’t take much in the way of good news or rumours to trigger a chunky short-covering rally, so trading conditions will likely become increasingly treacherous from here.

CHF – increasingly neglected currency and somewhat of a tell that the recent volatility across markets has failed to trigger much activity here, though one wonders if that can remain the case if the Brexit vote sees an aggravation of fresh EU existential worries.

AUD – weakening in line with risk appetite and that correlation likely to stick if not in high beta fashion unless commodities weaken more or China gets more negative attention. 0.7400 looks like a swing area in AUDUSD, though the bigger development would be a breakdown through the 0.7300/0.7250 zone.

CAD – Oil prices are lower again and at a key support area and USDCAD is back near 1.3000 as we continue to look for signs of a tradeable break higher.

NZD – Not much to go on here – nice comeback in AUDNZD from new lows on Monday as Australian political concerns don’t have much bearing here and NZD is the least preferred of the two in this environment. That pair is overdue for a rally while we watch NZDUSD for whether we achieve a breakdown through the 0.6950/0.7000 zone.

SEK – Riksbank coming up here before pixel time – not expecting fireworks from the Riksbank and generally judging SEK as a weak beta currency to global risk appetite, with more sensitivity to Eurozone economic trajectory.

NOK – slipping on oil prices again and thinner currencies suffer on weak risk appetite – so attention reverts to top of range in EURNOK at 9.40/45.

Upcoming Economic Calendar Highlights (all times GMT)

  • Riksbank Interest Rate Decision (0730) 
  • US May Trade Balance (1230) 
  • Canada May International Trade Balance (1230)  
  • US Fed’s Tarullo (FOMC Voter) to Speak (1300) 
  • US Jun. ISM Non-manufacturing (1400) 
  • US Fed FOMC Minutes (1800) 
  • Japan BoJ Governor Kuroda to Speak (0030)

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— Edited by Martin O'Rourke

John J Hardy is head of forex strategy at Saxo Bank


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