Calm before the storm
The Pound fell to the lowest level against the greenback since the early October flash crash over the weekend, based on reports that the UK Prime Minister Theresa May would signal a ‘hard Brexit’ during a keenly anticipated Brexit speech tomorrow. May is expected to add emphasis on curbing free movement of people by regaining control over Britain’s borders and immigration laws. Her speech should clearly state whether she’s willing to fight to remain in the EU’s single market or choose the hard way. Doing so, the UK will lose access to the European Union’s single market and could resurface uncertainty over economic implication of the potential historic move. The pound has fallen about 20% against the dollar since June’s EU referendum, to lows last regularly seen in 1985.
A senior investment director at Investec stated that the Bank of America was forecasting the pound could fall to multi-year lows ahead of a very busy week lined in terms of financial reporting. Laura Lambie, senior investment director at Investec,stated whilst interviewing for the BBC ‘there’s a lot for the market to digest over the next five days, so I suspect the pound may well be a casualty of that’.
In Trump’s first UK interview for the Times, the president elect said he thought the UK was “so smart in getting out” and promised a quick trade deal between the US and the UK. Having failed to revive a greenback rally by not providing fresh catalysts on his economic stimulus plans at his first press conference last Wednesday, the elected President will be given the chance to address the American people on the direction he’s planning to take the country in the next four years when he becomes inaugurated into the White House on Friday. While we can’t know for certain what his inauguration speech will entail, many hope he will provide more clarity on the key themes highlighted during his campaign which in turn could affect the currency rates.
Ahead of the inauguration, several Federal Reserve (Fed) presidents are due to speak including Fed Chair Janet Yellen. Most monetary policy makers agree that three interest rate hikes is a very possible scenario even though the markets only believe two will take place.
China may have put a few short-term currency speculators to the sword last week, but long-term investors betting against the yuan are still roaming and they carry much more ammunition. An abrupt tightening of yuan liquidity in Hong Kong, which traders believe was orchestrated by Chinese authorities, drove overnight rates on the offshore component of the yuan to record highs above 80 percent and made it prohibitively expensive for punters to borrow and short-sell the yuan. That pulled the offshore yuan from lifetime lows near 7 per dollar, but did not alter expectations for the yuan to depreciate this year.
Data to watch:
The Bank of England Governor, Mark Carney will be speaking later this afternoon and his comments come a day before the British PM Theresa May will be holding her press conference on Brexit.
U.S. markets will be closed today to commemorate Martin Luther King. The U.S. economic calendar begins to heat up on Wednesday with the release of inflation data and industrial production followed by housing starts and building permits on Thursday.