Pound Plummets to 20-Month Lows, PM May Delays Brexit Vote

Summary: “The Pound Is Sinking” sung Paul McCartney in his 1982 tune of the same title in his album “Tug Of War”. This pretty much sums up yesterday’s chaotic currency markets. Changing the lyrics for the original currencies to today’s, sung to the same tune..“The Loonie’s falling, the Rupee’s reeling and feeling quite appalling. The Dollar is holding, the Yen is fading, the Aussie’s very weak, but everyone’s still trading. UK PM May’s decision to delay today’s scheduled parliamentary vote on Brexit saw Sterling sink to 20-month lows. May’s decision was due to a warning from colleagues of a resounding defeat in parliament of her Brexit deal which now risks no deal. UK Gilt prices rallied, yields tumbled.
Elsewhere in the markets, Brent Crude Oil prices slid 2.6%. Canada’s Loonie fell 0.71% to 1.3405 (1.3323). Reserve Bank of India governor Urjit Patel’s unexpected resignation saw the Indian Rupee slump 1.65%. Emerging market currencies were all lower against the Dollar.

  • GBP/USD – slumped to April 2017 low of 1.2507 from 1.2735 at yesterday’s open. Sterling settled back at 1.2560 after breaking the support at 1.2600. The yield on the UK ten-year gilt slumped 7 basis points to 1.19% as bonds rallied. Sterling looks suspect and a break of 1.25 could see a test of 1.2350. While any rally should stop at 1.2660, expect more volatility ahead.
  • USD/JPY – rallied to a high of 113.274 after dropping to an overnight low of 112.24. The Dollar’s strong rebound suggests good support in the 112.20 area. Strong resistance can be found at 113.40. Looking like more consolidation ahead.
  • AUD/USD – found a good base around 0.7180 yesterday (low 0.71779), settling at 0.7188, down 0.16%. After it’s strong rally last week, the Aussie appears weak. The trade conflict between the US and China will weigh on the Antipodean currency. Commodity and resource prices slid yesterday led by Brent Crude Oil. Copper slid 1.3% while gold and silver were lower. The CRB Index (Commodity Research Bureau) were all lower. AUD/USD closed at 0.7188 (0.7200 yesterday).
  • USD/INR – soared to close at 72.51 from 71.37 yesterday. This currency pair has fallen from 73 to 70 following the Emerging Market turmoil in October and November. The resignation of the RBI Governor and upcoming local elections are weighing on the Indian Rupee. Incumbent PM Modhi and his ruling party face a tight contest. Emerging market currencies from South Africa’s Rand to Russia’s Rouble all tumbled against the Greenback. Another EM currency crisis is possible.

On the Lookout: Expect the US Dollar to consolidate it’s gains after yesterday’s big sell-off. Asian markets will be cautious following the volatility in Europe and North America yesterday.
Economic data due today include Australian House Price Index for Q3, National Australia Bank’s Business Confidence Index and Conditions for November as well as Japan’s Machine Tool Orders. Across the Atlantic, markets will look at UK Employment and Wage data for November. German and Euro-Zone ZEW Economic Sentiment Index are due. Finally, the US reports Headline and Core PPI data (November).
Market positioning from the latest CFTC report (week ended December 4) revealed that speculators added to their short Euro, Yen and Sterling positions. Net speculative Aussie shorts were pared.

Trading Perspective:

  1. GBP/USD – this currency pair looks heavy even at current levels. While GBP/USD managed to rebound off the overnight low at 1.2507 to its current 1.2562, a test of 1.2500 cannot be ruled out. Expect Asia to consolidate between 1.2510 and 1.2580 before European traders have another go at the downside. The latest CFTC report (week ended December 4) saw an increase in speculative short Sterling bets to -GBP 39,800 contracts from the previous -39,100. While that is a small change, overall speculative shorts are at their biggest since May 2017. Volatility will continue to rule the Pound.
  2. USD/JPY look for further consolidation between 112.00-113.50 with a test lower more likely. Stocks stabilised yesterday but risk appetite remains shaky. The yield on the US Ten-Year bond was flat at 2.85% while Japan’s 10-year JGB yield slipped 2 basis points to 0.03%. Currently the US Dollar is the go-to currency as a safe-haven. This will change as we head into the new year. Expect the Yen to come back.
  3. AUD/USD slip-sliding away, the Aussie is losing support with market’s risk-off profile and lower resource prices. This currency pair has had a weak tone since the close on Friday. There is a good chance that the strong support at 0.7160 will be tested with the next support coming in at 0.7120. Immediate resistance can be found at 0.72 and 0.7220. The latest CFTC report saw a slight decrease in net speculative Aussie short bets to -AUD 50,800 contracts from -53,900. This is still the biggest number of spec shorts since November 2015. Look to buy the dips today to 0.7160.
  4. USD/INR – a break above 73.50/74.00 could spell danger for the Emerging Market currencies, looking fragile once again. The USD/ZAR jumped 2.04% to 14.40 from 14.00 yesterday while Russia’s Rouble lost 1.11% against the Greenback. The RBI has intervened to keep the Rupee from weakening further most of November. USD/INR pulled back to 69.00 from 73.50 at the end of November. Emerging Market currencies are closer monitored these days, often they could lead the Majors.