Finally, the market has it right for the Bank of England…but not for GBP…
Market expectations for the Bank of England (BOE) indicate that it is almost a forgone conclusion that a rate hike will be announced by the BOE this week. This wasn’t always the case. Until September, expectations for a rate hike this year had bounced between around 10% to 60%, and mostly toward the bottom end of that range. So why does the market have pricing wrong for GBP? Finally, the market has it right for the Bank of England…but not for GBP…
The turmoil surrounding Brexit negotiations and the uncertainty over the future economic arrangements have been a key reasons why investors have believed it unlikely that the BOE would raise interest rates. Indeed, the rebound in GBP stalled as European Chief Negotiator Michel Barnier and his UK counterpart David Davis traded uneasy statements back-and-forth about the status of the discussions. However, ongoing inflation pressure, a more hawkish tone from BOE Governor Carney and resilient economic numbers have been the reasons for our long held view that the BOE would hike rates in 2017. The knee jerk rate cut triggered by the EU referendum result in June 2016 has proven to have been unnecessary and the current aggressively accommodative stance of the central bank is now counter to its objective of price stability.
Downside risk för EUR/GBP
While GBP appears well valued against the US Dollar, real interest rate differentials between the Eurozone and the UK are supportive of further gains in GBP against the Euro. Indeed, we expect further downside for the Euro, which we feel remains overvalued, with the European Central Bank ECB) striking a much more cautious tone than the BOE. Although ECB President Draghi has announced a ‘downsize’ of its asset purchase program, he noted the need for ‘continued support from monetary policy’ as ‘domestic price pressures are still muted’. With no rate hikes on the horizon, investor positioning looks stretched, hovering near record highs, and EUR/GBP will move back into the 0.84-0.88 range it was trading in for the majority of 2017. Market consensus for EUR/GBP is for 0.90 by year-end. So while the market has it right for the BOE, it has it wrong for GBP.
Martin Arnold, Global FX & Commodity Strategist at ETF Securities
Martin Arnold joined ETF Securities as a research analyst in 2009 and was promoted to Global FX & Commodity Strategist in 2014. Martin has a wealth of experience in strategy and economics with his most recent role formulating an FX strategy at an independent research consultancy. Martin has a strong background in macroeconomics and financial analysis – gained both at the Reserve Bank of Australia and in the private commercial banking sector – and experience covering a range of asset classes including equities and bonds. Martin holds a Bachelor of Economics from the University of New South Wales (Australia), a Master of Commerce from the University of Wollongong (Australia) and attained a Graduate Diploma of Applied Finance and Investment from the Securities Institute of Australia.
De populäraste valutorna och varför de är så populära
Forexmarknaden är världens största och mest likvida marknad, med triljoner dollar som handlas varje dag mellan miljontals parter. För de som precis börjat på forexmarknaden är ett av de första stegen att bekanta sig med några av de mer vanligt förekommande valutorna och deras populära användningsområden. Detta gäller inte bara för valutamarknaden utan också generellt. Låt oss ta en titt på flera populära valutor som alla forex observatörer ska känna till och några av de bakomliggande egenskaperna hos varje. Vi har tittat på de populäraste valutorna och varför de är så populära.
Den Amerikanska dollarn
Först och främst finns den amerikanska dollarn, som är den mest omsatta valutan på planeten. USD kan handlas i ett par med alla andra större valutor och fungerar ofta som mellanhand i triangelvalutatransaktioner. Detta beror på att USD fungerar som den oförutsedda globala reservvalutan, som innehas av nästan alla centralbanker och institutionella investeringsföretag i världen.
På grund av amerikanska dollarns globala acceptans, används den av vissa länder som en officiell valuta, i motsats till en lokal valuta, en ökning som kallas dollarization. Dessutom accepteras amerikanska dollarn allmänt i andra nationer, som fungerar som en informell alternativ betalningsform, medan de här nationerna behåller sin officiella lokala valuta.
Dollarn är också en viktig faktor på valutamarknaden för andra valutor. Den kan fungera som riktmärke eller målränta för länder som väljer att fixa eller pegga sina valutor till USD-värdet. Från och med 2011 har Kina sin valuta, renminbien, som fortfarande är knuten till dollarn, något som retar många ekonomer och centralbanker. Oftast väljer länderna att fixa sina växelkurser till USD för att stabilisera sin växelkurs snarare än att låta de fria (valutamarknaderna) fluktuera.
Euron
Även om denna valuta är relativt ny har euron snabbt blivit den näst mest omsatta valutan efter den amerikanska dollarn. Dessutom är euron världens näst största reservvaluta. Euron är officiella valutan för majoriteten av nationerna inom euroområdet. Euron introducerades på världsmarknaden den 1 januari 1999, med sedlar och mynt som trädde i omlopp tre år senare.
Utöver att vara den officiella valutan för de flesta euroländer, knyter många nationer inom Europa och Afrika sina valutor till euron. Detta av samma skäl som valutorna är knutna till dollarn – för att stabilisera växelkursen.
Euron som en allmänt använd och betrodd valuta som är den mycket utbredd i forexmarknaden, och lägger till likviditet i valfritt valutapar som det handlas i. Euron handlas gemensamt av spekulanter som ett spel på euroområdets och dess medlemsländers allmänna hälsa. Politiska händelser inom euroområdet kan ofta leda till stora handelsvolymer för euron. Detta gäller särskilt i förhållande till de länder som såg sina lokala räntor falla drastiskt vid införandet av euron, särskilt Italien, Grekland, Spanienoch Portugal. Euron kan vara den mest ”politiserade” valutan som handlas aktivt på valutamarknaden.
Den japanska yenen
Den japanska yenen är den mest omsatta valutan från Asien och ses av många som en proxy för den underliggande styrkan i Japans tillverkningsekonomi. När Japans ekonomi går bra, så går yenen (i vissa avseenden) bra. Många använder yenen för att mäta den övergripande hälsan i Stilla Havs-regionen, med beaktande av ekonomier som Sydkorea, Singaporeoch Thailand, eftersom dessa valutor handlas långt mindre på de globala valutamarknaden.
Yenen är också välkänd i forex cirklar för sin roll i carry trade. Med Japan som i princip har en nollräntepolitik under en stor del av 1990-talet och 2000-talet har handlarna lånat yenen nästan utan kostnad. De har sedan använt dessa för att investera i andra högre valutor runt om i världen, vilket berodde på skillnaderna i räntorna. Med carry trade som en så stor del av yenens närvaro på internationell nivå har den japanska valutans ständiga upplåning gjort uppvärdering till en svår uppgift. Även om yenen fortfarande handlar med samma grunder som någon annan valuta, är dess förhållande till internationella räntor, särskilt med de mer omsatta valutorna som dollarn och euron en stor determinant för yenens värde.
Det brittiska pundet
Det brittiska pundet, även känt som pund sterling, är den fjärde mest omsatta valutan på valutamarknaden. Det fungerar också som en stor reservvaluta på grund av dess relativa värde jämfört med andra globala valutor. Även om Storbritannienär en officiell medlem i Europeiska unionen valde landet att inte anta euron som sin officiella valuta av olika skäl. Till exempel historisk stolthet i pundet och upprätthållande av kontrollen över inhemska räntor. Av denna anledning kan pundet ses som ett rent spel på Storbritannien. Forexhandlare kommer ofta att basera sitt värde på den totala styrkan i den brittiska ekonomin och politisk stabilitet i sin regering. På grund av sitt höga värde gentemot andra valutor är pundet också ett viktigt valutaindex för många nationer och fungerar som en väldigt likvid komponent på valutamarknaden.
Den Schweiziska francen
Den schweiziska francen ses av många som en ”neutral” valuta. Mer korrekt betraktas den schweiziska francen som en tillflyktsort inom valutamarknaden, främst på grund av att schweizerfrancen tenderar att röra sig i en negativ korrelation med mer volatila råvaruvalutor som kanadensiska och australiensiska dollar tillsammans med amerikanska statsskuldväxlar. Den schweiziska nationalbanken har faktiskt varit känd för att vara ganska aktiv på valutamarknaden för att se till att francen handlas relativt snävt, att minska volatiliteten och hålla räntorna i linje.
Den kanadensiska Dollarn
Sist på vår lista tittar vi på den kanadensiska dollarn, även känd som loonie. Loonie är förmodligen världens främsta råvaruvaluta, vilket innebär att den rör sig i takt med råvarumarknaderna. Detta gäller särskilt råolja, ädelmetaller och mineraler. Med Kanada som sådan en stor exportör av sådana varor är loonien mycket flyktig mot rörelser i sina underliggande priser, särskilt råolja. Traders handlar ofta den kanadensiska dollarn för att spekulera på rörelserna för dessa varor eller som en hedge mot sina innehav i de underliggande kontrakten.
Dessutom ligger Kanadai närheten av världens största konsumentbas, USA. Detta gör att den kanadensiska ekonomin och den kanadensiska dollarn är högt korrelerad med styrkan i amerikansk ekonomi och rörelser i amerikansk dollar.
Slutsats
Som vi har sett har varje valuta särskilda egenskaper som påverkar dess underliggande värde och prisrörelser i förhållande till andra valutor på valutamarknaden. Förstå vad som rör en valuta och varför är ett avgörande steg för att bli en framgångsrik aktör på valutamarknaden.
ETF Securities FX Research: Market underpricing UK rate hike risk
Highlights
Upside potential for GBP despite the mixed message from the Bank of England (BOE) keeping volatility elevated. The market is underpricing the chance of rate hikes.
Rising real interest rates will continue to be supportive of Sterling (GBP) in coming months.
Positioning for GBP against the USD has rebounded to historical averages, but remains depressed against the Euro, which is an overcrowded trade.
One year on from the last rate cut, the Bank of England (BOE) has kept rates on hold, with the MPC voting 6-2 in favour of the decision (roughly the same as last month). Although policy remains unchanged, GBP should remain supported by what is expected to be a tighter policy path in 2017/2018. Indeed, Governor Carney has indicated that policy may need to be tightened at a faster rate than the market is currently pricing.
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Currency volatility has made a persistent move upward in recent weeks, largely to the detriment of the Pound. A relatively more hawkish policy stance by the UK central bank will support the Pound as Brexit negotiation outcomes remain obscure. As we believe inflation will remain stubbornly high, real interest rate differentials will become an increasingly important indicator for FX markets. Rising real interest rate differentials in the US continue will remain a supportive influence for GBP.
Cautious Bank of England
While a decidedly cautious tone was struck by Governor Carney at the BOE press conference last week, tighter policy is coming: if UK economic growth continues at the rate the BOE has forecast, the market is underpricing the amount of policy tightening that is necessary. The market is only pricing in a 50% chance of a rate hike by end March 2018.
The UK economy remains somewhat mixed after the EU Referendum, with the unemployment rate at pre-crisis levels and evidence that both the manufacturing and services sector are growing in a robust manner. However, negative real wage growth and plummeting consumer confidence remain a constraint for the household sector.
The reason for the additional BOE stimulus (a rate cut and additional asset purchases) a year ago was appropriately forward looking, as Governor Carney quoted; ‘the weaker medium-term outlook for activity…[will lead to] an eventual rise in unemployment’. The UK central bank seems to have become less proactive since then, highlighting that the UK is currently ‘in the teeth’ of the squeeze for households and both consumption growth and business investment will improve further in coming months.
Inflation pressure mounts
Meanwhile, inflation remains elevated in the UK and well above the BOE’s target. The longer this continues, the greater the chance of expectations becoming unanchored, especially if energy price gains are sustained. While inflation hasn’t surprised to the upside in recent months, market implied inflationary expectations remain elevated (well above a year ago), and above other major economies. Inflation is expected to remain above the BOE target for the entire BOE forecast horizon, a period of three years. The BOE’s credibility is on the line, because it appears to be becoming less proactive with policy and reacting to events that have, and may not, occur i.e. a hard Brexit.
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Current BOE policy remains extremely accommodative. There may be uncertainties around the Brexit negotiations, but we believe emergency interest rate settings do not seem appropriate. Indeed, Governor Carney notes that there are limits to what monetary policy can do relating to the Brexit situation. We expect that negotiations surrounding Brexit will remain in flux and given there is unlikely to be significant progress made, the worst-case scenario has already been digested by the FX market. In turn, the BOE is likely to unwind their Brexit induced rate cut from last year in H2 2017.
The key sentence in the BOE’s Monetary Policy Summary report is ‘The combination of high rates of profitability, especially in the export sector, the low cost of capital and limited spare capacity, supports investment by UK firms over the forecast period, offsetting the effect of continued uncertainties around Brexit’. Surely if the economic uncertainty surrounding Brexit is offset, then the 2016 rate cut and additional stimulus should be unwound…if not in 2017, then when?
Just a day after the meeting, the mixed messages to the market continued: Deputy Governor Broadbent, who voted to keep rates unchanged, commented that ‘there may be some possibility for interest rates to go up a little bit’. This is reminiscent of the previous meeting that was interpreted dovishly by the market, only for the ‘doves’ to signal tighter policy was an issue that needed discussion only days later. Mixed messages are an impediment for economic stability and consumer and business confidence.
Meanwhile, gradually tighter Fed policy is already priced into the USD. Although we expect the broad USD index is in a bottoming process, a move higher will be gradual and predicated on political risks fading, something that will take time given investor focus on the incompetence of the Trump administration. Accordingly, the more hawkish policy that we expect from the BOE will bring forward expectations of a rate hike in the fourth quarter and forcing GBP higher in H2 2017.
How the market is positioned
GBP positioning has rebounded against the USD, in line with the recent more bullish performance and is now at levels consistent with longer-term historical averages.
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Against the Euro, GBP looks extremely attractively priced – hovering around record low levels. We feel that the Euro strength is at risk of an unwind as the ECB remains conservative in its policy approach in the face of the elevated Euro. Compared to historical long-term averages, positioning for the Euro highlights a very overcrowded trade.
The bottom line…
The mixed messages from the BOE are confusing investors and keeping GBP volatility elevated. We expect the BOE to unwind its Brexit-induced rate cut of 2016 in the second half of 2017, but not to remove its balance sheet stimulus from the economy. GBP will benefit from tighter policy settings. We believe that GBP will consolidate above the 1.30 level and potentially break to the upside, approaching 1.35.
For more information contact:
ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com
Important Information
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).
The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.
This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.
This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.
ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.
ETF Securities FX Research: Upside potential for GBP after UK election
Highlights
We expect that the British Pound (GBP) will experience a period of consolidation ahead of the UK election in early June, as polls for PM May see-saw.
Investor sentiment has rebounded strongly, albeit from record levels of pessimism. We expect that the worst-case scenario surrounding Brexit negotiations has already been priced in for GBP.
Fading political risk, higher real rates, and a resilient economy will see GBP post gradual gains in H2 2016, potentially targeting the 1.35 level against the US Dollar.
Consolidation ahead of UK election
We expect that the British Pound will experience a period of consolidation around current levels ahead of the UK election in early June. The latest polling indicates that Prime Minister May’s lead has declined, prompting a modest pullback in the local currency. We expect that although GBP could soften further in coming weeks, as the Conservative party’s lead see-saws, but believe it will stay above key support of 200-dma, which is currently 1.2595.
Any further decline in PM May’s popularity could see a rise in GBP volatility, as the election result becomes more uncertain. Sterling has historically reacted negatively to volatile periods. There is a strong inverse relationship with Sterling exhibiting weakness during periods of heightened volatility.
Currently, global currency volatility is moderating as political uncertainty fades. While a more benign volatility environment will be supportive of gradual gains in GBP, we expect this to be increasingly apparent following the June 8th election.
Investors more optimistic
Investor positioning has begun to rebound from the lowest levels on record in the futures market, indicating that there is growing optimism for the UK’s economic prospects as ‘Brexit’ negotiations begin. Although still in negative territory, GBP net shorts have more than halved since the record pessimistic positions seen at the end of March 2017.
Investors have become more positive on the outlook for GBP because the domestic economic environment has remained resilient.
Financial sector key for GBP
We expect that the worst case scenario has already been priced in regarding the Brexit negotiations and its impact on the economy and the financial services sector in particular. In coming years, a rising rate environment and further clarity surrounding the EU-UK negotiations should be reflected in rising banking sector valuations.
A 2017 House of Commons Library briefing paper indicated that the financial and insurance services sector contributes over 7% of the UK’s Gross Value Added, a measure of the value of goods and services produced in the UK. Additionally and importantly a supportive factor for the local currency, the financial and insurance sector generates a trade surplus of the equivalent of 3% of UK GDP. Nonetheless, the Bank of England expects some softer numbers from the household sector as wage growth has been revised down at the same time that inflation is rising.
Price pressures apparent but fading
Inflation has breached the Bank of England’s target to the upside and is now at the highest rate since July 2013. In April, CPI rose 2.7% from a year ago, while core inflation rose to 2.4% from 1.8%. Imported inflation resulting from the weaker GBP has been one of the main avenues for inflation lifting in 2017, via imported food and fuel. However, the impact of currency weakness is beginning to fade. The Bank of England noted the rise in the GBP since its previous inflation statement in February, which will help moderate the rise in import prices. GBP has risen 4% since but remains 12% below the post EU Referendum levels of 1.48.
With headline inflation expected to peak near current levels, we believe that real rates are forming a bottom. Accordingly, GBP has responded in line with the modest rebound in real yields and we expect the gradual move higher in yields to continue. Not only do we expect the Bank of England to reverse the Brexit-induced rate cut of last year, but inflationary pressures are expected to moderate as the impact of the exchange rate plunge on prices begins to fade.
If the recent upward pressure in core CPI begins to gain momentum, the central bank will need to move more quickly to dampen inflationary expectations. Currently only one MPC committee member is voting for a rate hike, but that could quickly change post-election.
The bottom line…
After the election, as FX volatility continues to moderate, GBP could again test the 1.30 level and potentially break to the upside as the domestic economy remains resilient, targeting 1.35.
Important Information
General
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).
The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.
This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.
This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change.
Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular,
ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.
GBP to gain after the UK election. We expect that the British Pound will gain after a period of consolidation around current levels ahead of the UK election next week. The latest polling indicates that Prime Minister May’s lead has declined, prompting a modest pullback in the local currency. We expect that although GBP could soften further in the coming week, as the Conservative party’s lead see-saws, but believe it will stay above key support of 200-dma, which is currently 1.2595.
While we expect a Conservative election win, the future EU negotiations remain an important driver of GBP direction. We continue to believe that the worst case scenario has already been priced in regarding the Brexit negotiations and its impact on the economy and the financial services sector in particular. In coming years, a rising rate environment and further clarity surrounding the EU-UK negotiations should be reflected in rising banking sector valuations.
Investor positioning has begun to rebound from the lowest levels on record in the futures market, indicating that there is growing optimism for the UK’s economic prospects as ‘Brexit’ negotiations begin. Although still in negative territory, GBP net shorts have more than halved since the record pessimistic positions seen at the end of March 2017. In contrast, Euro positioning is at the highest level since November 2013, and any further dovish comments from ECB Board members, could prompt a sharp decline in EUR/GBP in coming weeks.
Investors have become more positive on the outlook for GBP because the domestic economic environment has remained resilient. Nonetheless, the Bank of England expects some softer numbers from the household sector as wage growth has been revised down at the same time that inflation is rising.
With headline inflation expected to peak near current levels, we believe that real rates are forming a bottom. Accordingly, GBP has responded in line with the modest rebound in real yields and we expect the gradual move higher in yields to continue. Not only do we expect the Bank of England to reverse the Brexit-induced rate cut of last year, but inflationary pressures are expected to moderate as the impact of the exchange rate plunge on prices begins to fade.
After the UK election next week, as FX volatility continues to moderate, GBP could again test the 1.30 level and potentially break to the upside as the domestic economy remains resilient, targeting 1.35.
Martin Arnold, Global FX & Commodity Strategist at ETF Securities
Martin Arnold joined ETF Securities as a research analyst in 2009 and was promoted to Global FX & Commodity Strategist in 2014. Martin has a wealth of experience in strategy and economics with his most recent role formulating an FX strategy at an independent research consultancy. Martin has a strong background in macroeconomics and financial analysis – gained both at the Reserve Bank of Australia and in the private commercial banking sector – and experience covering a range of asset classes including equities and bonds. Martin holds a Bachelor of Economics from the University of New South Wales (Australia), a Master of Commerce from the University of Wollongong (Australia) and attained a Graduate Diploma of Applied Finance and Investment from the Securities Institute of Australia.
