Sterling keeps falling against USD and Euro
Sterling plummeted yesterday to its lowest rate against the USD in 2 years as the two remaining Tory Party leadership candidates appeared to spook the currency by refusing to rule out a no-deal departure from the EU on October 31st. GBP/USD dropped to 1.2396, the first time it had dipped below 1.24 since March 2017, and below the ‘flash crash’ of 1.2409 which occurred on 3rd January this year. The losses were further compounded by a rise in the USD following strong US retail sales data yesterday. It was expected at 0.1% but came out at 0.4%. Today the focus will be on UK inflation data, our own Retail sales data out tomorrow followed by Public Sector Net Borrowing on Friday.
Sterling has dropped over 1% this month against the Euro. This is predominantly driven by Sterling weakness on a number of fronts. We saw the Pound fall sharply on Tuesday as both Hunt and Johnson affirmed their desire to leave the EU at the end of October. As we have seen over the past 3 years as a no-deal Brexit becomes more likely the Pound falls on the fears. The UK economy is also not performing particularly well which is putting more pressure on the Bank of England to cut interest rates thus further weakening the Pound. At the moment there is nothing to suggest that the post-Brexit low of 1.0800 will be tested and perhaps breached as the Pound continues to weaken.
Oil price strengthens CAD
The pound to Canadian dollar exchange rate has been on a steady decline since the start of May, when it became apparent Theresa May would be resigning and a more no-deal Brexit supporting PM might take charge. Sterling has been losing ground regularly against most currencies as no-deal Brexit prospects increase, as investors fear the worst ahead.
The Canadian dollar has been stronger too as the price of Oil rises, and also the Bank of Canada (BoC) maintain their current interest rate. Whilst ongoing trade tensions with China and the US, and a generally lower global economy, had all heaped pressure on the BoC to look to cut rates, the BoC held firm at their recent July meeting.
The current truce in trade tensions between the US and China has also helped restore some confidence for the Canadian dollar, which is now stronger. Whilst these type of issues could threaten the strength of the Canadian dollar, by undermining global confidence in this commodity currency, at present the CAD is stronger.
Inflation remains unchanged in New Zealand
The New Zealand Dollar advanced to the top of the G10 league table Tuesday after a bounce in the official measure of inflation saw market expectations of an August interest rate cut from the Reserve Bank of New Zealand (RBNZ) subside, although local analysts have not been swayed by the prices data.
New Zealand inflation was 0.6% during the second quarter, which was unchanged from in the opening quarter although that number was enough to lift the annualised rate of inflation from 1.5% to 1.7%.
“NZD is top performer. Q2 NZ inflation was in line with expectations but NZD has taken it well, with 1.7%y/y somewhat undermining expectations of an August cut,” says Elsa Lignos, head of FX strategy at RBC Capital Markets.
Brexit fears keep weakening GBP against AUD
Another sell off in GBPAUD this week as prices hit the lowest level since Jan 2019 at 1.7630 and whilst GBP remains weak there’s every chance of this continuing to sell off and move towards the Dec low at 1.7217. Indeed Westpac analysts are looking at further weakness in GBP with an expected low to come in Autumn – as threat of Boris Johnson closing parliament around the 31st Oct to instigate a no-deal Brexit. UBS are putting a note out to clients that suggests the most likely course of events is another extension to Article 50 and further negotiations which would give the pound a reprieve. Meanwhile over in Australia has cut its interest rates twice this year and the market is pricing in a third rate cut before the end of the year – that will have been largely priced in however so the main drivers of Aussie going forward will continue to be trade war escalation or cessation which directly affects Australian exports and trade balance. In terms of technical outlook, further downside to GBPAUD in the short term, fresh lows initially at 1.7220 then onto 1.6980 and on the upside, initial target will be 1.7850 onto 1.8050