Today's news headlines:
- ‘Pound Slides as no-deal Brexit chances slide under Boris Johnson’ The leading contender for Prime Minister has promised to leave the EU in October irrespective of an agreed deal. The Pound is under greater selling pressure which is likely to intensify as the deadline nears. (Financial Times)
- ‘Almost $12tn in bonds trading with sub-zero yield’ The increase in geopolitical tension has resulted in a stampede into high-quality, negative-yielding government bonds. This is the highest concentration of investment in negative-yielding safe assets since 2016. The prospect of development market central bank easing has created the expectation that yields may still fall further. (Financial Times)
RBA signals further action
In recent decades Australia has been a key player in China’s vast economic expansion, exporting commodities to support their manufacturing and construction led development. The ‘China slowdown’ is often used to describe the transition of the Chinese economy to the higher end of the value chain and gradual transition to consumer economy. While China continues to import a third of Australia’s exports, the escalating US-China trade war and slowing global growth are taking their toll on the Australian economy.
As central banks around the globe turn dovish in response to these economic risks, so has the Reserve Bank of Australia (RBA). In the last RBA meeting, they cut rates for the first time in three years and have overnight signalled further cuts this year. It’s no surprise that looser monetary policy has been adopted by Australia in the wake of China’s economic slowdown, although it is unclear which has been the greater motivating factor: Chinese economic transformation or slowing global growth. As central banks around the world announce key policy announcements this week, it seems Australia won’t be alone in moving towards a more supportive policy stance this year. The prevailing market reaction has been risk-off which is expected to prevail in the medium-term.
Bottom Line: The Dollar Index climbs back above its 200 daily moving average, continuing its year-to-date rally as investors seek haven assets. The latest RBA move raises the question about the degree of slowdown central bankers have imputed in their models. The so-called ‘reaction function’ or decision-making process is unchanged, so it’s seems more likely that their economic projections are pointing south instead.
Pound slides as leadership race intensifies
Ahead of today’s second round of voting to elect a new UK Prime Minister, the Pound index fell to its lowest level since January. Politics has been the big driver for Sterling’s valuation since the 2016 referendum, in which Boris Johnson’s outlandish claims played a large part in the UK voting to leave the EU. Yesterday, Johnson picked up surprise support as former rival and EU supporter, Matt Hancock, publicly backed his campaign – despite BoJo’s promise to deliver Brexit by Oct 31st at any cost. Sterling had traded relatively flat over the last week, but this revelation was enough to drive the Pound lower, as expectations for a chaotic EU exit increased. Even a hawkish tone from the Bank of England may not be enough to support the Pound, as Jordan Rochester (FX strategist at Nomura) commented “A no-deal Brexit in October is still a market concern. But it’s not just politics that drives price action, the data surprises and data momentum in the UK have been pretty poor too”.
Bottom Line: Currency markets are patently rattled by the prospect of a disorderly Brexit in October and a weak run of economic data has added to the concern. The case for a rate hike in the event of an orderly exit outcome is diminishing as the lasting effect of uncertainty grips the UK.
Sterling had been trading sideways since the beginning of June, but this week the downward pressure has resumed, pushing the pair near December 2018 lows. The Dollar had been the primary driver of GBP/USD in recent sessions, but the market is on pause until the Federal Open Market Committee meeting reveals its policy outlook this Wednesday.
With the EUR regaining some ground and the Dollar steady for the moment, we have seen this pair supported at the 50-day moving average. Given the sheer multitude of geopolitical issues weighing on markets, further Dollar appreciation is not out of the question.
Last week’s EUR sell off has been halted and minor gains had been posted this week. Sterling’s renewed downward journey is leading the pair lower albeit, rather slowly. Today’s EUR ZEW survey data might be a telling indication of Eurozone industrial prospects and hint at European Central Bank policy intentions.