Pound in Freefall

Daily Analysis - 07/10/2016

British Sterling Tumbles during “Chaotic” Asian Trade

The British Pound tumbled to a fresh 31-year low against the US dollar in two minutes of tumultuous Asian trade, with investors attributing the steep declines to the simultaneous triggering of computer-initiated sell orders.

Pound Collapse Sees HFT Exacerbate Volatility

The over -6.00% plunge in the Pound during the Asian overnight session marked the biggest move since the UK’s “Brexit” referendum, driving Sterling to as low as $1.1840 to the lowest level seen in the GBPUSD pair since March of 1985. The ferocity of today’s decline is further evidence of the extreme volatility that is becoming commonplace in the global foreign exchange market as algorithmic traders keep increasing their transaction volumes. Some analysts reckon that French President Francois Hollande’s comments on Thursday, urging EU members to lead tough negotiations with the UK to avoid contagion, might have also helped bearish sentiment to peak. Going forward, the outlook is not bright for the currency as speculation of further rate cuts by the Bank of England gather momentum amid the backdrop of a possible December rate hike from the US Federal Reserve.

WTI Crude Mounts Key $50 Per Barrel Mark

US West Texas Intermediate crude oil futures climbed above the key $50.00 per barrel psychological barrier in a sign that market participants are getting increasingly confident about the outlook for the energy patch. The current short-term bullish trend in the commodity is showing no signs of exhaustion as speculators continue buying at every dip in price. This momentum may well continue for some for time as the market prices in the planned OPEC output cut and the surprising inventory destocking in the US. OPEC plans to iron out a deal to coordinate simultaneous production cuts among member states when it meets in late November. Clues on any progress made may be evident when representatives of major producers meet in an informal gathering on the sidelines of an energy conference next week. Brent futures, which have already scaled above $50.00, were last trading at $52.77 a barrel.

Chinese Forex Reserves Dip

Chinese foreign exchange reserves fell by a greater than expected pace in September, data from the People's Bank of China showed today, adding further credence to reports that the country’s Central Bank has stepped up efforts to defend the Yuan. Reserves last month fell by $18.79 billion compared to August’s decline of $15.89 billion. Economists polled by the Wall Street Journal had projected an $11.00 billion drop in September. The latest decrease was the largest monthly fall since May. In an effort to continue easing policy to help the economy meet its growth targets, maintaining the Yuan peg to the dollar has grown increasingly expensive as evidenced by the outflow from reserves. At a certain point, the Central Bank may be forced to give up on its efforts, as the strategy becomes too costly considering the necessity of reserves for financing trade.

French Industrial Production Rises

After months of disappointing news and a GDP contraction that transpired during the second quarter, French investors were greeted with positive news on the back of better industrial production figures. According to INSEE, industrial production rose by 2.10% during the month of August, beating expectations of a 0.70% climb. Furthermore, the prior figure was revised higher, from its previous reading of -0.60% to -0.50%. The data coincides with a pickup in trade, which has seen both exports and imports rise with the trade deficit staying on hold at EUR -4.3 billion during August. While unemployment for the nation remains just shy of 9.90%, the pickup in inflation could be a positive sign for the outlook, with consumer prices accelerating to a 0.40% increase on an annualized basis during September.