Thursday, 14 July 2016

Sterling firm with eyes on new prime minister's Brexit view

Sterling was firmer on Wednesday, trading near a two-week high against the euro as Theresa May was set to take over as Britain's prime minister, easing some of the political uncertainty that has dogged the currency in the past few weeks.

Traders will keep an eye on who will be appointed as finance minister with many awaiting for clarity on the new prime minister's detailed thinking on triggering Article 50, the procedure for exiting the European Union.

May has said "Brexit means Brexit", but added Britain will not rush to trigger the formal divorce proceedings. The uncertainty over whether Britain will be able to retain access to the single market after exiting the EU, along with expectations that the Bank of England could cut rates on Thursday, are likely to make traders wary of sterling.

Sterling was up 0.1 percent at $1.3270, having hit a high of $1.3340 in the Asian session, its highest since July 4, and well above a 31-year low of $1.2798 struck on July 6.

The euro was down 0.3 percent at 83.25 pence, having fallen to 83 pence in Asia, its lowest since June 30.

"It remains unclear for the time being as to whether the UK will retain free access to the single market, and therefore the potential for setbacks in sterling is high," said Thu Lan Nguyen, currency strategist at Commerzbank.

"After all, the massive current account deficit causes considerable concern against the background of continued uncertainty."

Britain runs a current account deficit pegged at around 7 percent of gross domestic product - amongst the highest in the developed world. That makes the pound vulnerable to changes in foreign capital flows needed to plug the gap.

BoE chief Mark Carney has hinted he may ease policy to cushion the economy from Britain's shock decision to exit the EU, with markets pricing in a more than 70 percent of a 25 basis point rate cut on Thursday. The BoE has said the economy is likely to suffer a slowdown in coming months.

"We think the pound's rally will run out of steam once investors learn that the economy is likely to slow down from the investment side, weakening employment and then finally consumption," Morgan Stanley said in a morning note.

Officials from the world's largest asset manager, BlackRock, said on Tuesday Britain would fall into recession over the coming year and growth in each of the next five years would be at least 0.5 percentage points lower as a result of Brexit.


The yen clawed back some ground on Wednesday after recording its biggest two-day falls in almost two years, as the strong risk appetite that had taken hold across markets at the start of the week faded a little.

The safe-haven yen had tumbled 4 percent against the dollar since the start of the week, its worst performance since November 2014, after Japan's Prime Minister Shinzo Abe's ruling coalition won a clear victory in upper house elections, fuelling expectations of more stimulus.

Monday's news that Britain would by Wednesday have a new prime minister -- current interior minister Theresa May -- and a bumper U.S. jobs report at the end of last week had also boosted risk sentiment, which had served to further dent the yen.

Some investors had hoped that former U.S. Federal Reserve chair Ben Bernanke's meetings with Japanese leaders this week would herald the adoption of "helicopter money", a term which Bernanke has in the past mentioned as a way central banks might finance government budgets to fight deflation.

But the dollar hit a session low of 103.95 yen shortly after Chief Cabinet Secretary Yoshihide Suga told a news conference that it was not true that the government was considering the policy.

"If we had had clear comments concerning helicopter money last night then maybe dollar/yen...would have continued to go higher," said UBS's director of currency strategy Constantin Bolz, from Zurich.

"But markets were super risk-on in the last two days and today seem to be giving back a little bit of that, so it makes sense that dollar/yen gives back a little bit of the gains."

Currencies seen as riskier plays that had rallied sharply on Tuesday such as the Australian dollar and the New Zealand dollar, which had hit a 14-month high, fell back.

The dollar was 0.5 percent down by 0800 GMT at 104.175 yen, while the euro fell 0.7 percent to 115.06 yen, but was still up about 3.5 percent so far this week.

While the yen may ease further in the near term, a sustained drop against the dollar seems unlikely, said Daisuke Karakama, chief market economist at Mizuho Bank in Tokyo.

"I think these moves are nothing more than position squaring and will prove temporary," Karakama said.

Later in the day, a Bank of Canada meeting on monetary policy is in focus. Though analysts are not expecting an interest rate cut, they think a dovish tone could be struck in the wake of the vote for Brexit, which could weigh on the Canadian dollar, which was down 0.3 percent.

Reference: Lisa Twaronite

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