Summer trading and Libra
The summer doldrums are here. Volatility in FX markets has all but dried up, only GBP providing fireworks as UK and EU leaders quarreled. Declining interest rate expectations and rising stock of negative-yielding bond have marginally exciting the FX carry trade. Traders are taking asymmetrical risk by going long TRY in our view. While equities are bobbing up-and-down with every rumor, news flash, and Trump tweet. S&P 500 weakened marginally as falling oil prices (due to easing tensions between US / Iran) weighed on energy stocks and Dallas Fed Kaplan suggested US rate cuts were “tactical adjustment” verse full easing cycle. The compressed US front-end rates jumped on the statements. Transportation stocks reported higher than expected 2Q earnings continuing a solid trend of earning reports.
Only the public thrashing of Facebook’s crypto play Libra before the Senate Banking Committee kept us from running to the beach. Granted, this committee was significantly more prepared to handle the concept of potential global cryptocurrency, then when Facebook CEO Market Zuckerberg ran over congressional lawmakers last year. The overall impression was that US lawmakers were no happy. One factor that did not sit well (among a long, long list) with members that Libra Association would be regulated by the Swiss government specifically Swiss Financial Markets Supervisory Authority (FINMA). Head of Facebooks blockchain subsidiary Calibra David Marcus clearly stated that Libra Association intends to comply will all U.S. tax, anti-money laundering, and anti-fraud laws. However, with primary jurisdiction in Switzerland it hard to imagine anything more than a light touch approach by Libra. We have doubts that Libra will be anything more than another digital payment system rather than a disrupting payment token (lack of decentralization is a HUGE issue for us). The reality is Facebook with root still very much in the “real world” and enjoying the blanket protection of the US government is unlikely to push the project much further if the US puts the kibosh on it. The negativity was felt in the crypto space as Bitcoin hand another down day falling to $9238 overnight (50d MA). We would argue that Libra’s exposure should be positive for bitcoin as it highlights the complexity in developing widely accepted alternatives. Marcus will be defending Libra in front
GBP traders holding their breath as inflation data near
The free fall in GBP is difficult to ignore as GBP/USD and GBP/CHF pairs are trading at early 2017 ranges while the situation in GBP/JPY is less rosy as the pair trades at late 2016 levels, confirming that GBP weakness is heavily skewed towards Brexit headlines, while upside moves are particularly short-sighted. The release of inflation data for the month of June, as is the case for the job report, is likely to be ignored ahead of next week Conservative Prime Minister elections. Yet although market participants are anticipating a major victory for Boris Johnson and so of a hard Brexit, chances are that they discount the risk of a stuck majority in the House of Commons and a less stringent stance from European Commission in Brexit negotiations.
Inflation is expected to have remained stable in June, with y/y and m/m CPI forecasts at 2% and 0% (prior: 2% and 0.30%). Despite the release, we don’t expect the Bank of England to take any major decisions accordingly, as early general elections and the resumption of Brexit talks are underway. Following the nomination of EU Commission President Ursula von der Leyen along with other EU top position leaders, it seems that the risk of a no-deal scenario is likely to decrease as a change of EU negotiators will occur. Although current Brexit deadline is set for 31 October 2019, a major UK political disruption (e.g. early general elections planned by Boris Johnson following his nomination) should trigger a short-term extension, thus allowing fresh negotiation with new EU representatives. The recent violent downtrend in GBP is mostly explained by yesterday Prime Minster debate where both candidates confirmed they would be willing to remove the Irish backstop from current Withdrawal Agreement deal. GBP should be maintained under pressure considering upcoming 1 August BoE monetary policy meeting. However, positive headlines concerning Brexit should provide strong upward moves looking forward.
GBP/USD is trading at 1.2402, approaching 1.2380 short-term.
