The Sterling has had a reasonably quiet start to the week. Flows in Asia have been somewhat mixed with a bias to buy in GBPUSD but to sell GBP on the cross amid increasing pressure after the UK government proposed to walk away from the withdrawal bill which will surely complicate matters.
The Financial Times reported that the Japan trade deal subjects the UK to more stringent state aid rules than those currently under negotiation with the EU. The market is still looking to sell rallies, but clearly, the situation is highly dynamic, and you need to cover positions with an eagle eye.
I think EURGBP looks far too rich; hence GBPUSD too low, as I expect the Tory rebellion will likely fizzle out. But that is a guess, not a fact.
Constant US dollar selling pressure across the forward curve is eliciting pushback.
While refraining from setting a cap, the central bank urged investors to show restraint in selling USD, especially in single large transactions. There is concern that a stronger currency could crimp exports in what remains a weak global trade environment.
Interestingly the rest of the ASEAN basket has taken note, triggering the bellwether and USDCNH to pull back after pressing lower from the opening bell this morning.
Yuan gets support from near-term sentiment
Everyone is running with the assumption the World Government Bond Index (WGBI)would make CGBs part of all the major government bond indices by 2021, likely extending the recent trend of accelerating foreign debt inflows into 2021 and boosting near-term Chinese Yuan sentiment.
If that doesn’t happen, any postponement would be a setback.
However, I still don’t think it would be a major one. China’s economic recovery post-pandemic will be buttressed by consumption, investment, and the export rebound, suggesting the Yuan will be more than able to bounce back from any mild WGBI disappointment.
US Fed in centre stage this week
With the US Federal Reserve taking centre stage on Wednesday, Forex markets price action has been relatively muted in Asia, with flows reasonably balanced.
Unless there is a dovish surprise from the FED, it’s probably pointless to extract any meaningful currency direction from central bank policy, which is especially true with rates already at zero and Quantitative Easing (QE) doing nothing for the real economy.
Euro rides on positive stock market sentiment
Today the US dollar is doing little more than shifting to the vagrancies of broader risk appetite. Stock up EUR up.
I am starting to wonder whether European Central Bank (ECB) President Lagarde has control of the Governing Council.
The more hawkish elements think they have free reign to undermine the ECB’s position continually. I expect this debate to intensify and given the market is trading on psychology rather than much else it could push the EURUSD higher.
Equity investors remain optimistic
Even though the Feds are unlikely to go full tilt, there is sufficient policy juice in the tank, not to mention what’s in reserve to keep the market humming along quite well.
Despite the sharp sell-off last week, investors remain optimistic about the US equity market’s path in the coming months.
Economic data points to a continued recovery while further reopening and vaccine progress will likely set the wheels in motion for another move higher in stocks.