FX5: Pound Plummets Most In Six Years

Monday February 22: Five-things the markets are talking about

After months of speculation U.K Prime Minister Cameron finally announced the EU referendum (Brexit) vote date on the weekend – June 23rd.

Dealers, investors and speculators can expect the Pound and all Pound crosses to be remain highly volatility over the next four-months.

“Uncertainty” comes with a premium

Demand is spiking for contracts that protect investors from a big move in GBP this summer. Dealers noted last week that the cost of some options have hit its most extreme levels since Europe’s sovereign debt crisis. Implied volatility (vols.) had rallied +12% vs. +8.4% cost recorded two-months ago.

1. Sterling Falls As London Mayor Endorses Brexit

U.K’s PM Cameron does not have an easy fight on his hand. Comments from his office seemed to suggest that the PM was able to negotiate an acceptable agreement with EU leaders last week, which allowed him to set June 23rd as the referendum date for a vote on membership over the weekend.

That progress has since been faced with a hurdle of opposition and the most profiled since comes from the London Mayor, Boris Johnson (considered a future Tory leader). In an open editorial over the weekend he argued against continued EU membership.

The possibility of a much closer Brexit campaign (close to even odd’s either way) has seen sterling plummet overnight (£1.4148 down -1.8%). The ‘leap into the unknown’ – what a EU exit would look like for companies, equities and bond markets – will be highly debated over the coming four-months. Thus far, market turmoil seems to be FX concentrated. However, investors can expect some historically explained assets class moves in such a hotly contested event.

Moody’s has already warned that it may revise U.K credit rating to Negative if UK referendum is in favor of a “Brexit”.

2. Other Week’s Global Events

With the major Tier 1 Central Banks a no-show in the month of February has investors scrapping for monetary directional information. However, this week does not bring too much new directional information to the table.

Investors will get a reading on the health of the manufacturing sector with the February flash manufacturing PMI’s for Japan, Eurozone, Germany, France and the U.S.

The U.K will release its second estimate of GDP along with its biggest Euro allies, Germany and France. On Friday, the G20 meeting of finance ministers and central bank governors will kick off in Shanghai. Will there be any sort of collusion announcement that may have a material impact on markets? Investors should be expecting rumors and innuendos to become more heightened as this week progresses.

Overnight, Japan’s preliminary February manufacturing PMI sunk to its lowest level in 12-months (50.2 vs. 52.2e) though remained in expansion for the tenth-consecutive month. Japan’s New Export Orders were also very weak at 47.9 vs. 53.1 prior – the biggest contraction in three-years. With numbers like these BoJ Governor Kuroda will find it more difficult to say he still sees the Japanese economy recovering moderately with positive gradual impact from negative interest rate policy!

This morning, Germany’s manufacturing PMI hit a new 15-month low in February, falling to 50.2 from January’s 53.2. A print like this would suggest “near-stagnation” in the sector. The EUR (€1.1062) heads into the North American sessions testing new overnight lows.

3. China Makes Changes At The Top

Confirmation of the change at the helm of China’s securities regulator CSRC is seen as a reason for optimism. Investors seem to be betting on improved market transparency which has sent the Shanghai Composite to a one-month high in overnight trading.

Authorities have removed CSRC’s Xiao Gang (a co-architect of the doomed circuit breaker system that instigated a mini-equity crash) and replaced him with Liu Shiy. The former chairman of Agricultural Bank of China has earned a reputation as being a more practical operator.

4. Crude Remains Better Bid ………..For Now

Surprisingly, energy markets do not seem to be discouraged by comments from Iranian Oil Minister Javadi forecasting an increase of Iran’s oil production from +4.0m bpd to +4.7m. To date, a concern about a global glut has managed to keep pressure on “black gold.”

Instead, crude has been bid higher (WTI $30.71, Brent $34.02) amid risk-on sentiment and also on comments from Russian Energy Minister Novak suggesting that the recent amongst top producers indicated a “shared position.” He also indicated that the oil surplus would likely fall -1.3m bpd without additional oil supplied to the market. Anything to suggest that the global supply dynamics will change for the better will be sure to please crude bulls.

5. Riksbank February Minutes

The release of this morning’s minutes from the Swedish Central Bank suggests that the decision to cut interest rates further into negative territory was a close call (Riksbank cut by -15bps to -0.50% on Feb. 11).

The minutes noted that Sweden’s domestic economic activity was expected to continue to strengthen, but several voting members again noted a number of potential downside risks. Not surprisingly, due to low energy prices, the boards 2016 inflation expectations have changed and are now seen as weaker compared to their December forecasts.

The board again remains unanimous on the readiness of the Central Bank to intervene in the markets and loosen further monetary policy, even between meetings.

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