05 February 2020: Volumes up, Volatility down

Volumes up, Volatility down

05th February: Highlights

  • Sterling regains 1.30 level after upbeat data
  • Dollar higher despite rising risk appetite
  • Eurozone facing Brexit dilemma

Sterling facing a more volatile future

The Latest figures from the Bank of England show that in October 2019 average daily FX trading volume in London rose to $2.88 trillion per day across all currency pairs. This was an 11% rise on a year earlier. Despite the increase in volumes, volatility was low. This is because during Brexit negotiations, the market was driven in a single direction where huge positions were taken, then reversed as the market moved as one.

This year it is likely that the position will reverse somewhat as there is expected to be more speculation about the trade deal that the UK will reach with the EU rather than the binary Brexit or not decision which faced Parliament during most of last year.

Yesterday, economic data on the construction industry again proved the wisdom of the MPC subsequent to its decision to leave rates on hold following its meeting last week.

Construction activity rose to 48.4 in January from 44.4 in December.

Services output data will be released later this morning and is expected to be unchanged in January from December’s 52.9. Any significant deviation in either direction is likely to affect the direction of the currency.

Sterling reacted positively to yesterday’s data and managed to regain the 1.30 level which it was below at last evening’s close. It made a high of 1.3047, before drifting back to close at 1.3034

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U.S. economy likely to lose $11 Billion in income from China

The ongoing Coronavirus outbreak which has killed more than 400 hundred people and decimated travel to and from China will have a major effect on the global economy as it is likely to last several months.

Over the past few days, China has accused the U.S. of deliberately inflaming tensions over the spread of the virus for its own reasons. This is a clear message that the Chinese will not provide any concession over trade in talks with the U.S. which are due to restart but will now doubtless be delayed.

The first direct cost associated with what is now approaching epidemic proportions is the release of data that shows the U.S. economy is likely to lose around $11 billion as Chinese tourists are unable to visit the country.

The U.S. Secretary of Commerce commented yesterday that the country is close to agreeing what penalties, mostly in the form of increased duties (or tariffs), it will charge to countries that artificially undervalue their currencies. China and Japan have been the traditional culprits but more recently Germany (outrageously) and Switzerland have come under the Treasury Department’s microscope.

As was mentioned recently, it will be interesting how Israel is treated since the BoI is perfectly open about what it is doing to keep the shekel under control (https://en.globes.co.il/en/article-boi-governor-to-continue-buying-foreign-currency-1001316710)

There seems to be a certain degree of conflict between the Dept’s of Commerce and Treasury.

Treasury recently removed China from its list of possible currency manipulators, while Commerce is still considering levying tariffs. If this happens, in the wake of the recent accusations over Coronavirus, it will be another irritant that may derail trade talks even if they could take place.

Yesterday, the dollar index continued to rise despite the apparent improvement in risk appetite that saw both the CHF and JPY weaken. It rose to a high of 98.01, closing at 97.95

Eurozone continues to lose ground to UK

It is hard to imagine the second half of this year providing such a turnaround for the Eurozone economy that growth outstrips the UK in the first year of Brexit. That is despite the UK finding itself (through its own doing) in a Brexit Netherworld where it is no longer a member of the EU, but still contributes to the budget, abides by the rules but has no direct say in any decision making.

The eurozone economy is not necessarily dead in the water, but it does need a major dose of stimulus. The most recent evidence of a 0.01% improvement in activity proves two things; 1) that the market is beginning to be grateful for any form of positivity and 2) it will be 22 months before the economy can be considered to be expanding again if the current rate continues. Remember the date, sometime around October or November next year.

On current evidence, The ECB is prepared to wait that long but it is doubtful that the markets will accept that time or the bank’s will be able to wait that long. Corporate lending is still falling as corporate clients find little need to invest in any major capital purchases or are unwilling to take the plunge until they see definite signs of large infrastructure projects being instigated by the individual states of the region.

The euro continues to be the dollar’s plaything behaving in a purely reactive manner. Yesterday, it reached a low of 1.1033, closing at 1.1044 despite the apparent improvement in risk appetite.

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.”