The Pound has made highs across the board and importers and investors have responded quickly and emphatically, bringing volume flooding into the currency.
Yesterday, the sentiment of certainty around Johnson achieving a win in the upcoming election has turned the taps on in support of the GBP – the chances of achieving a Brexit deal (and the knock on effects of this ending months of uncertainty and economic instability and wanton expenditure*) finally seem more tangible. The impact was dramatic, the Pound making the highest figures versus USD for 7 months and the highest it has been against the EUR for 2.5 years (the GBPAUD at the highest in 3.5 years). The support for the Pound comes largely from institutional investors and Britain’s importers taking advantage of a chance to pick up on gross profit margin through lowering their effective import costs. From the vantage point of XE.com, we saw a spike in uptake of tools designed to lock away rates at these levels for use later and over the uncertainty of the remaining run up to the General Election.
From the US, the suggestion by Trump that the first phase of the trade deal with China might not be concluded this month is bad news for net export or commodity based currencies given their dependency on the two huge consumers in the trade war and the uncertainty it will continue to bring. This probably impacted the Australian Dollar most squarely and, certainly, it was the hardest hit from a currency level perspective. But as long as the talks are on track this shouldn’t present any more than a blip on the road to support. The slew of poor data from the States made the Non-manufacturing data a very interesting ‘watch out’ as investors sought to review factors that help them decide whether or not the States are in a material slowdown and (even) could be the beginnings of conversations that could cause hawkish re-pricing at Fed level. This figure was another disappointment so there could very well be an air of keen observation on any more of these figures highlighting a more significant overall economic weakness.
Nathan Janzen, senior economist at the Royal Bank of Canada, points out that the Bank of Canada struck a more neutral tone yesterday and the key overnight rate was left unchanged at 1.75% which sent the currency soaring, despite the backdrop of the trade war.
He said: “The BoC remains concerned about the global backdrop and potential risks for the domestic economy. But today's statement referenced "nascent evidence that the global economy is stabilizing." On the domestic front, the central bank shares our own view that underlying details of the as-expected slowing in Q3 GDP were decidedly more positive than the headline alone and called out the stronger than expected rise in business investment.”
He pointed to a strong labour market and an inflation rate that has been right on target consistently but with a good level of wage growth.
Key levels at the time of writing:
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