Cable crashes to $1.3000
Brexit fears ramped up as liquidity returned to markets Tuesday and the British pound tumbled to $1.30. The yen was the top performer while GBP lagged. The Asia-Pacific calendar is light. In the Premium trades, a short AUDJPY was opened last night 1 hour ahead of the RBA decision (trade remains open), followed by another trade in a major equity index.
Cable sank more than 250 pips on Tuesday as it broke the post-Brexit low and touched 1.30 for the first time since 1985. There was no headline behind the selling. The UK services PMI data was a touch better than expected but Carney encouraged British banks to lend while the 3 leading property funds in the UK froze $12 bn worth of redemptions. Those events led to a bump in cable to near 1.32 from 1.31 but ultimately the downside prevailed and cable touched 1.3000 at the low.
The market continues to digest the Brexit vote and evaluate what will happen next. The first round of Conservative leadership voting took place and two candidates dropped out. Theresa May has what looks like a commanding lead. Once the race is down to two candidates – likely May and Andrea Leadsom – party members will vote by mail.
In the meantime, sentiment is deteriorating. Flows and holidays have skewed trading so far in July and today was the first real look at underlying momentum. Commodity currencies, GBP and stock markets suffered but the most noteworthy move might have been in bonds.
Treasuries, gilts and bund yields all hit record lows at various spots on the curve. The market is screaming that central banks will be forced hold rates down. The old mantra of 'lower for longer' has been replaced by 'never forever' regarding hikes.
The Fed's Dudley said it was still early to evaluate the Brexit vote but argued for patience on interest rates. Williams was more hawkish but it's clear that the core of the FOMC is in no hurry to hike. Soft factor orders underscored the point at -1.0% compared to -0.8% expected.
A final spot to watch is oil. Crude has been consolidating for the past month but a 5% decline on Tuesday knocked it close to the lower end of the range. A breakdown would give USD/CAD a fresh boost and signal new concerns about the strength of the global economy.
Eid Saeed to our Muslim readers as three days of holidays begin to celebrate the end of Ramadan.
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