Daily Market Brief 5 Apr 2017

Driverless Pound drifts lower

April 5th: Highlights

  • Traders no longer waiting for every Brexit comment
  • Change to monetary policy unlikely
  • Trump flies to China

With no new influences, Sterling in reactive mode

It typifies the FX market that, like a child opening its presents at Christmas, it is always rushing to move onto the next surprise.

Having fallen close to 20% since the Brexit vote, it is safe to say that Political Risk is fully priced into the value of the pound. Sterling had a tumultuous first quarter adrift on a sea of rumour and speculation. Now it wallows in calmer waters as traders try to drum up interest in a rate hike that is, in truth, unlikely to happen during the Brexit process.

By contrast despite a fall against the dollar, the Euro has also been reactive.

Political events in Europe this year were projected to be the major driver for the single currency but, so far, an entirely predictable Dutch election and a French election which has been tame, have failed to ignite interest.

The first ballot in the French election is a little over two weeks away and there is plenty of scope for currency volatility. It is dangerous to be too casual over market reactions as that is when the unexpected strikes! In France, the large percentage of voters who, per polls, are yet to make up their minds is the one item that should suggest caution.

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Trump making waves as he prepares to meet Xi

A bout of frisk aversion has engulfed the market as President Trump turns his thoughts to Asia. He has dipped into his bag of mischief and come up with North Korea as the first item on his Asian Odyssey.

In typical fashion, Trump has foregone any semblance of diplomacy acting like the bully he is depicted as, stating “If China won’t help, the U.S. is perfectly capable of “sorting out” North Korea alone”. Such a threatening stance gains plenty of column inches but is what causes investors and traders to run for cover. It is difficult to truly gauge President Trump’s intentions, despite the bellicose rhetoric, since he has a huge appetite for the soundbite.

In preparation for Trump’s first foray outside the U.S. investors have been buying the Japanese Yen as a “safe haven” trade in case there is turmoil.

North Korea has ramped up the caution by firing a ballistic missile into the sea. It is difficult to truly know if that is, the limit of their abilities or if there a genuine threat from the last truly closed nation in the world.

The JPY which has been steadily strengthening took a breather, halted by “Gotobi” buying of dollars.

Traditionally Japanese settle their accounts on the 5th day of the month or on a multiple of five.THis is termed Gotobi. Yes, it is difficult to compute that in our high-tech world such traditions can still exist and exert influence!

It could, of course merely be a trader’s way of explaining a market he does not fully understand. He will simply label a correction to recent Yen demand as “Gotobi” and all his peers will nod sagely.

“NFP Day” looms large

The market is gearing itself up for the employment report which will be released in the U.S. on Friday. Optimism is growing that a higher than trend rise in the hourly wage growth component will spur the Fed’s rate hike policy to be revised.

Since no one is truly able to gather and compute meaningful data without huge margins for error, the only way of creating such optimism is by pure speculation.

Today, there is also a speech from BoJ Governor Kuroda in which he may shed some light on the effect of higher than expected inflation data. In true “Central Bank speak” he will probably revert to “we are guided by the data” and “we are more interested in the trend than one month’s numbers”. The current master of this language is BoE Governor Carney, followed closely by Fed Chair Yellen.

U.K. Services sector growth which is reported today is expected to be unchanged from last month. Since the “export” of the U.K. manufacturing sector, services data has grown in importance. Any effect on the pound from an “off trend” number will be short lived and greeted by BoE’s Carney saying…………similar words to BoJ Governor Kuroda earlier!

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”