Tuesday, July 12, 2016

"Easing Political Uncertainty Encourages Animal Spirits"

The pound is at 1.3134 up 1.37 cents.
From Brown Brothers Harriman & Co's Marc Chandler:
Sterling is leading the new appetite for risk as one element of political uncertainty has been lifted.  It is moving higher for the third consecutive session today; advancing by more than 1.5 cents to reach $1.3180. It staged an impressive recovery yesterday after trading down to $1.2850, nearly a retest on last week's 30-year+ low just below $1.28.  Recall last week's high was set near $1.3340.   
Although we did not see any convincing technical sign that a recovery was imminent, we warned that after three consecutive weekly declines and dropping in five of six weeks, only a slight provocation was needed to spur a short-covering bounce.    The key issue is whether this is a one-day wonder (short-term move) or whether sterling has legs (low of some importance is in place, and sustained recovery is at hand).    
We had thought sterling would bounce around the BOE meeting, and we had been inclined to see a recovery after a rate cut.   The Bloomberg survey was almost evenly divided between those who expect a 25 bp cut and those who don't.  The argument for waiting was that the new post-referendum forecasts would be made next month, and these would provide cover (justification/explanation) for the change in policy.  However, the BOE had a thought-out risk scenario in case of Brexit, and this becomes the base case.   
Sterling has hardly pulled back during its run-up today, and there is scope for a further squeeze, but we are not convinced this is anything but a short-term correction.  Surely to be convincing, sterling has to move outside of last week's range, which does not look likely, at least at this juncture.  Th next technical target is near $1.3255....
...The main feature from the US today are the two Fed officials (Tarullo and Bullard) who speak while in the North American morning, while Kashkari and Mester speak after the close.  Also, the market is waiting for the EU finance ministers’ decision on whether to sanction Spain and/or Portugal over excess deficits.