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Forex Freakap - GBP Outperforms: EU Set to Cave on Fisheries?



Welcome to the first episode of the Forex Freakap!


Every day, following the close of European markets, I will be delivering a concise recap of all of the day’s major fundamental news and events and how they influenced G10 FX markets (and other asset classes such as stocks, bonds and commodities)!

Lets crack on with today’s freakap shall we!!


Before I talk about GBP, which is today’s outperformer, I always like to start discussing the tone of the day; i.e. were there any swings in the markets broad risk appetite (risk on or off), are market quiet or choppy, and why.


Why?


Market risk appetite is the number 1 factor in determining FX market flows. I would advise any FX traders out there that you have to stay on top of the major market themes such as central banks, the state of the Covid-19 outbreak or US/China trade tensions if you are going to have success in the long run. These themes affect ALL asset classes, including FX markets, so don’t think you can get away with ignoring what is going on in the stock, crude oil or bond markets.


This might sound daunting. That’s where I come in. I will try my best to make developments in these macro themes understandable and to inform you as to what has been moving markets.


Market Tone


Amid a distinct lack of fresh fundamental drivers, risk appetite has been choppy today; the prevailing trend overnight and into the European morning was a combination of USD strength and risk asset weakness. I only really saw one fresh new negative fundamental development to explain this;


Remember yesterday the Chinese press were pumping up the stock market; as a reminder, China’s Securities Times suggested that fostering a "healthy" bull market is now more important to the economy than ever and that investors could look forward “to the wealth effect of the capital markets”. This gave a HUGE boost to Chinese stocks, pulling global stocks higher with them and resulting in risk on flows.


However, in wake of yesterday’s exuberance, Chinese press appear to have changed their tune, publishing front page articles to encourage a more cautious approach regarding the stock market and urged participants to act rationally – this appears to be contributing to today’s much more cautious, defensive risk tone.


However, since about midday (London time), USD has been coming off and risk assets have been recovering. US equities (S&P 500) now trade slightly in the green, as do crude oil markets. European bourses still trade mostly in the red, however.


Now, lets take a look more closely at FX markets and try to unpack what is going on…

GBP – Starting with GBP, today’s major outperformer, with GBPUSD flying higher to well above the 1.2550 mark. Positive news on the UK/EU trade negotiation front seems to be the major catalyst;


According to the Telegraph, EU Brexit Negotiator Barnier said the EU is willing to accept something called “zonal attachments” for UK fisheries after the transition period ends, if it was coupled with other factors such as assessing economic impact on coastal communities.

The use of zonal attachments (a scientific method of determining the number of fish in UK waters) has been a key UK request in the ongoing negotiations; so the fact that the EU are willing to compromise will hopefully bring the two sides closer to agreement on a deal, thus reducing the no deal transition period exit risk that has been weighing on GBP so much since the start of the year (hence the positive reaction of GBP).


Looking ahead for GBP, Finance Minister Sunak will deliver an address to the House of Commons tomorrow, where he is expected to add further detail on PM Johnson’s recently unveiled post-Covid-19 recovery plan. There is speculation that a number of measures could be unveiled such as VAT cuts, cash bonuses to firms for trainee hires, raising the stamp duty threshold, and alterations to the furlough scheme. GBP could be volatile.


USD – As mentioned above, USD has traded largely as a function of risk appetite, swinging to highs around midday (London time) of 97.15 (in the DXY), before retracing back beneath the 97.00 level in recent trade.


EUR – Has traded largely as a function of USD today; EURUSD swung to lows around 1.1260 amid earlier USD strength and is now trading around 1.1300 again. EUR is a slight underperformer today; German Industrial Output data this morning was a little soft, while the tone of the latest European Commission economic forecasts was also a little downbeat – they noted that easing of lockdown measures had been on the whole less swift than anticipated, leading their growth forecasts to be downgraded.


JPY – Despite risk off flows being the main theme of the day, JPY failed to catch much of a break. Perhaps the yen was weighed by back overnight all household spending data, which showed a record decline in May at a Y/Y rate.


CHF – Behaved much more as a typical haven than JPY today. Generally has traded flat vs USD and swung higher an lower in accordance with the swings in risk appetite.


CAD – An underperformer today, despite very strong Canadian Ivey PMI data this afternoon – Headline Canadian Ivey PMI jumped over 20 points to 62.9 in June, from 42.1 in May. CAD has perplexed me as of late given just how poorly it has performer on a consistent basis. The fact that the US is still threatening Canada with steel an aluminium import tariffs is likely a headwind, but otherwise I am not 100% sure why it has been underperforming some of its other peers (like AUD and NZD) so much.


AUD, NZD – AUD is pretty much back to flat on the day and NZD is now trading in the green vs USD. Gains in the antipodes come despite…


1) Growing concerns over a Covid-19 outbreak in Victoria, Australia; Victoria state reported 191 additional coronavirus cases today, and apparently the State’s Premier is now considering imposing a four-week state-wide lockdown. Melbourne, the state’s capital, is reportedly set to face a 6-week lockdown.


2) (more of note for AUD) A slightly more dovish sounding RBA, who maintained all their policy levers as expected (rates at 0.25%, 3-year bond yield target at 0.25%) and noted that the economy had recovered a little better in May than expected, but noted the risks posed by the accelerating Covid-19 outbreak in Victoria to the country’s recovery. AUD strength was not mentioned.


Gold – Has broken out to the upside in recent trade, amid USD weakness. Testing YTD highs again as we speak. 

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