Sterling has been blasted lower after BoE governor Carney cast doubt on a previously pretty-much-expected UK May rate hike. The EU's rejection of Britain's latest Brexit-Irish border plan only served to deepen the rot.
Article / 26 May 2016 at 14:05 GMT

Sound and fury signifying nothing. Nothing at all

Director / Accumen Management
United Kingdom
  • Listlessness is the rule but GBP is an exception
  • UK data continues to soften, GDP undershot badly
  • Japanese  domestic dynamics are of little import

By Ken Veksler

As I sit here, reticent of putting hand to keyboard I procrastinate by thinking of whether the Germans have a clever word for “really can’t be bothered”? And, perhaps unsurprisingly, it turns out they do!

That is perhaps the most useful piece of wisdom I can impart on you today. Ultimately markets, certainly in the FX space remain listless and just as I am, reticent to firmly commit one way or another.

There has been significant movement, however, in  GBP and the vast bulk of it coming via the direct USD and EUR legs. Many have been left wondering about the why and how with regard the drivers for this sudden burst of GBP strength and it would be remiss of me (as I’ve done in previous days) not to mention the obvious EURGBP and GBPAUD legs. 

Both have seen further GBP buying and both legs have experienced it with extreme prejudice. I don’t have a "real"reason to support the case, but would wager that it has more to do with delta hedging of existing exotic options structures than much else. But, please do bear in mind; this too is almost an arbitrary conclusion on my part in the absence of any other explanation.

So while it remains so painfully quiet I might as well take this opportunity to have a quick look around the bigger macro picture (more detail on this in my monthly round-up). 

Beginning with Australia, things there are now, largely as they have been since the beginning of the year; transitionally productive. In essence this means that with the flexibility in the labour force maintained unemployment continues to largely be a non-factor. Of greater concern however is the obvious inflation issue, which while showing that the Reserve Bank of Australia is prepared to act, is not something that will be fixed any time soon. This, in of itself, frankly isn’t so terrible. It simply means that we have an economy finding its place in the broader meandering global backdrop of lower inflation. So, in short we remain broadly “steady as she goes”.

 Brexit may be on everybody's lips but don't neglect the data. Image: iStock

The UK should be of far greater concern to anyone paying remote attention to anything beyond the referendum. The data continues to soften and a markedly lower print in the second estimate of UK GDP this morning is yet further proof of the fact. Arguably, Q2 data is set to look even softer as fear with regard the vote outcome drive suspension of investment and general economic activity. I remain predisposed to a negative view on the UK economy and feel that should they vote to stay in, the real (lagged) pain will be felt in Q3 and beyond.

I was asked just yesterday (for the second day in a row mind you) what I made of the Japanese situation and my rather simplistic answer was as follows; domestic dynamics matter as little now for Japan and the JPY as they ever have. The USDJPY rate is likely to be stuck in a relatively uneasy range of 107-112 until the Fed finally moves this year (likely September) and the Bank of Japan subsequently breathes a sizeable sigh of relief. 

Further internal domestic monetary policy is firmly on hold in my mind, and similarly to the VAT hike, nothing further shall be done before our calendars read 2017. The only caveat to this of course is whether or not the market perceives possible Fed action to be rational and timely, thus looking to reignite the standard carry trade mantra.

Europe is bottoming. The data I see (while highly subjective, as is all data) keeps pointing me to that very conclusion. It also means that the exchange rate aside, the European Central Bank is likely to remain sitting on its hands for at least the duration of this current quarter and the next. They needn’t have their hand forced and will delightfully sit back and see what outcomes derive from what they’ve already done by way of quantitative easing. Again throw into the mix a potential Fed hike and... Even the FX channel begins to look better. In short, I anticipate more meandering with regard the currency rather than outright directionality as stubborn EUR bears battle it out with the agnostic, objective rest of us.

And the US; well they’re fine. Really. Employment is looking after itself, slack is most certainly dissipating and much like Australia the inflation conundrum is not unique to them given the global backdrop. It does of course mean re-assessment of the media led “normalisation” narrative and hence rate rises, but I’m less concerned with article click numbers than I am with the Fed acting rationally and prudently which is what I believe they’re finally doing. Thus, the DXY consolidation we’ve seen in recent weeks shall continue in the near term with only perhaps a mild increase in its volatility as we near the relevant Fed meetings.

I’ll leave Canada until tomorrow, because frankly I don’t have the patience or requisite Canadian politeness today.

As always, helmets on and good luck out there.

– Edited by Clare MacCarthy


Ken Veksler is director of Accumen Management


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