Anyoption analyst Brett Chatz takes an interesting look at the very volatile GBPUSD ‘Cable’ trade, and what traders need to look for this week. For more of Brett’s research see the Anyoption blog.
The sterling is poised to break through the critical support level of 1.30 this week….
It has been a tumultuous time for the GBP/USD pair since the June 23 Brexit referendum. Over the past 5 trading days, the sterling has dropped 2.20%, and over the past 1 month it has plunged 9.06%. For the year-to-date, the GBP/USD currency pair is down 11.25%, with more negativity expected. The Cable as it is otherwise known is one of the most highly traded currency pairs in the world given the huge volume of trade taking place between the United Kingdom and United States.
Projections for the GBP-FTSE 100 Index
It is especially interesting to point out the symbiotic relationship that exists between a weak GBP and the FTSE 100 index. At the beginning of the year we saw similar paradoxical movements taking place with the JPY and the Nikkei 225 index. Recall that as the Japanese Yen was strengthening we saw the premier Japanese index plunging. As at 5 July 2016, the Nikkei 225 index is trading at 15,669.33, down 0.67% or 106.47 points. For the year-to-date the index is down 17.68%, while the USD/JPY has plunged by 15.60% (indicating a dramatic strengthening of the JPY).
Currency Fluctuations and the FTSE 100 Index
It is abundantly clear that as the currency of a country appreciates/depreciates, the international equities index moves in the opposite direction. To elucidate this, one has to understand the reasoning behind currency strength/weakness and the performance of listed companies trading internationally. Now that the GBP has hit a 31-year low, more GBP is required to purchase the same $1, €1 or ZAR1 etcetera. What this means in real terms is that the purchasing power of the sterling has diminished. In other words, the personal disposable incomes of Britons will decrease for all goods imported into the country. This is especially telling with things like petroleum, building supplies, and other commodities.
Britons wanting to travel abroad will see a decline in the purchasing power of the GBP when they tour the US, Canada, European countries, and developing countries. Consider the following currency exchange rates vis-a-vis the GBP and how much they have depreciated on 5 July, 2016:
- The GBP/JPY is trading at 132.79000, down 3.35 or 2.461%
- The GBP/DKK is trading at 8.73535, down 0.12775 or 1.441%
- The GBP/CNY is trading at 8.75530, down 0.1071 or 1.208%
- The GBP/CAD is trading at 1.69520, down 0.0136 or 0.796%
- The EUR/GBP is trading at 0.85170, up 0.01255 or 1.496%
- The GBP/AUD is trading at 1.75180, down 0.01255 or 0.711%
- The GBP/USD is trading at 1.30860, down 0.01925 or 1.45%
- The GBP/RUB is trading at 84.12600, down 0.319 or 0.378%
The GBP is Bearish and the Trend is Strong
In all instances, the declines in the GBP on Tuesday, 5 July are evident. This trend has been prevailing for several days and will likely continue as we get deeper into the Brexit weeds. As a currency trader, binary options trader, or a speculator of indices, commodities, stocks or FX pairs it is clear that the GBP has become persona non grata as a result of the prevailing uncertainty. It is front and centre the target of investor angst.
We will not know the impact of the Brexit decision on the GBP and the FTSE 100 for quite some time. For starters, important economic data releases such as quarterly GDP, retail sales, PMI manufacturing data and the like will only be available towards the end of July, and midway through August. And then there are preliminary GDP reports which will come out in September and October which will only contain partial data with which economists can base their suppositions. The full impact of a Brexit on the GBP cannot be ascertained with any degree of certainty at this time.
We have to remember that if we see a second successive quarter of GDP contraction, the UK will have entered a technical recession. That data will also be available later in the year. But once again, the technical recession that we are likely to see transpiring will not be 100% attributable to the Brexit decision. On Tuesday, 5 July we saw the yield on the UK 10-year government bond drop to 0.781%, a record low for this financial asset. This indicates the degree of risk aversion that is prevailing in the international markets.
The Hypothesis: QE and the GBP
As traders adopt a risk-off approach to equities, save-haven assets such as government bonds gain favour. When the demand for government bond increases, the price increases but the yield declines. The Bank of England is expected to enact fresh quantitative easing policies in July and August to try and stimulate the UK economy. When these events take place, we can expect the GBP to weaken further initially, followed by a flow of money into UK economy to boost overall economic activity and drive up inflation which will invariably lead to a strengthening of the GBP over the long-term.