Cable Gets Some Love as Buyers Lift the Quid

Cable Gets Some Love as Buyers Lift the Quid

27 May 2016, 13:10
Roberto Jacobs

Cable Gets Some Love as Buyers Lift the Quid

- G7 on FX: •We affirm our existing exchange rate commitments to market determined fx rates •Will consult closely in regard to actions in fx markets •We reaffirm our commitments to keep markets open, fight all forms of protectionism •We reaffirm our fiscal, monetary policies will remain oriented to meeting our respective domestic objectives and not target FX rates •We underscore importance of countries refraining from competitive devaluations •Excess volatility, disorderly moves in FX rates can have adverse implications for economic, financial stability.

- Shinzo Abe with closing remarks at the end of the G7 summit •Global economy was the biggest theme of the summit •Repeats the comparison between global economy now and Lehman crisis •There are concerns that the situation in EM economies is worsening •There's a risk of a prolonged slowdown in global demand •Global economy is facing a big risk of crisis •Abenomics will be deployed globally •Will make decision on sales tax hike before summer poll •There is a risk of the global economy falling into crisis if the appropriate policy response is not made Does anyone else get the feeling we're being set up?

- GBPUSD adds a quick 40 pips to 1.4689. There's no real news that I'm seeing though Sky has popped up a story that BofAML is looking to flog UK credit card firm MBNA. The firm holds around £7bn of loans on their books. That might have sparked some possible M&A front running….

- ………...alternatively, a USD rally would again be best served against the Pound if $GBPUSD fails below its 200DMA.

- ...for a risk aversion move, fading the inverse H&S neckline on $GBPJPY looks best suited.

- China industrial profits rose 4.2% in April (year-over-year) to 502 Bln Yuan.

- G-7 says Brexit would be a further serious risk to growth. German Chancellor, however, says it was not an key issue raised.

- Abe: Will make decision on sales- tax hike before summer poll.

- AUD/USD has been falling in a sharp downtrend for the past month from its late April high above 0.7800. The initial drop was accelerated after a surprisingly low Australian inflation (CPI) reading was released near the end of April and then was followed up in early May by a Reserve Bank of Australia interest rate cut to a record low 1.75%. Subsequently, the central bank lowered inflation forecasts and hinted at further potential rate cuts. At the same time that the Australian dollar has been heavily pressured this month, the US dollar has been in recovery mode as increased anticipation of a near-term rate hike by a more hawkish Federal Federal Reserve has fueled a rebound in the US dollar. This, in turn, has helped prompt a drop in gold prices, with which the Australian dollar is often positively correlated……….Since early May, this slide has led to strong breakdowns below major support levels, including: the 50-day moving average, an uptrend channel extending back to January’s multi-year lows near 0.6800, the key 0.7500 and 0.7350 support levels, and most recently, the 200-day moving average. The latest culmination of this precipitous decline has seen AUD/USD reach down to hit its key downside support target at 0.7200, around which the currency pair has fluctuated for the past week….With any further US dollar strengthening in the event of better-than-expected GDP data and/or a hawkish Yellen speech, a decisive breakdown below 0.7200 could occur, in which case the next major downside target is at the 0.7000 psychological support level.

- We believe the next catalyst for the USD appreciation will be an increase in real yields, which in our view have become the dominant driver of the currency, rather than nominal yields. Evidence that the US output gap is narrowing should prompt higher US real yields and a stronger USD. Given weak growth and low inflation expectations, real yields in Europe and Japan could do with staying low; however, with nominal yields already in negative territory there will in fact be a tendency for real yields to rise in Europe and Japan as inflation expectations fall….This should keep EUR and JPY strong. For many EMs, especially those with weak fundamentals and external vulnerabilities, the relationship is inverse.

As real yields increase in the US, we'd expect EM currency weakness and an increase in EM real yields. The exceptions are the DM-like EMs, such as Korea, where we'd expect an eventual drop in real yields to drive KRW weakness.

………….Risk events on the horizon. Rising US rate expectations support our bullish USD call, however not just in the context of higher nominal yields. In an environment of slowing global earnings, trade and growth, the manufacturing drag could again come into focus with Korea trade data and China's PMI due next week. Any resulting equity market weakness should support the short GBP and KRW trades in particular. FX investors will also be waiting for Yellen's speech on June 6, with a hawkish tone adding to USD strength. EUR should be stable from an ECB unlikely to change course.

- The Canadian dollar navigated a volatile trading day with little data out to Canada to support the currency. American economic indicators were in line with expectations with core durable goods orders grew at 0.4 percent and orders including transportation were 3.4 percent higher, but the core data is more telling as it removes the volatile transportations items and is a better gauge of purchasing trends. Yesterday’s announcement by the Bank of Canada (BoC) to keep interest rates unchanged at record low 0.50 percent and the higher than expected drawdown in U.S. crude inventories have boosted the loonie against the USD…

The USD/CAD has lost 0.7 percent in the last 24 hours. The pair is trading at 1.2993 after breaking the 1.30 price level after the loonie received a boost from oil prices that had Brent at $50 only to pare back some of those gains as the trading session progressed. Oil linked currencies had a chance to advance versus the USD as economic data out of the U.S. was in line with expectations and there was no insights pointing to a Fed funds interest rate in the June Federal Open Market Committee (FOMC).

- Major news for today: Fed Chair Yellen Speaks, USD GDP q/q. Revised UoM Consumer and Inflation Expectations.

Have a great weekend!


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