Hard Exit Talk Sent Sterling Below $1.20

<br /> Hard Exit Talk Sent Sterling Below $1.20 – Marc to Market<br />


The UK government strategy for Brexit is becoming clear.  Even though roughly half of UK immigrants come from
non-EU countries, in orders to control the other half, the UK will leave the
single market.   It will also not be subject to the European Court of Justice.  A week ago Prime
Minister May suggested this and sterling fell below $1.22 for the first time
since last October.  The general thrust of the comments was echoed by the Chancellor of the Exchequer
Hammond over the weekend, with an added seemingly implicit threat to compete
through lower corporate taxes if the EU negotiations force the UK to seek other
comparative advantages.  
Sterling gapped
lower and proceeded to fall to almost $1.1985 before recovering a bit.  
It has entered the gap, which extends to
last Friday’s low a little above $1.2120.  The thin conditions in early
Asia may have exacerbated the move, but the direction
was clear.  It risks oversimplification,
but a hard exit, which is understood to be the loss of access to the single
market, is understood as negative for sterling, while developments that slow
the process (like the Supreme Court decision expected next week) or cushion it
(like a fast trade agreement with the US, that President-elect Trump indicated
over the weekend) are seen as supportive for sterling.   
From a
technical perspective, there are different types of gaps, which are uncommon in
24-hour markets. 
 It may take a day or two of price action to determine
the kind of gap  The most benign gap would be
filled today or tomorrow.  A more significant gap would not be
filled and could signal the start of a new leg lower.   Sterling traded as
high as $1.2085 in the European morning before seeming to stall.   
The weaker
pound, however, is not buoying  UK
 In fact, the FTSE 100’s 14-day rally
is being threatened.  On the other
hand, the 10-year Gilts are rallying, with the yield slipping three to five
basis points after a seven basis point increase before
the weekend.  
More broadly,
the US dollar is higher against all the major currencies but the Japanese yen,
which appears to be drawing support uncertainty and heavier equities.
  The Nikkei lost one percent in the
sell-off that took the MSCI Asia Pacific Index off 0.5%, for its second
consecutive loss, the first of the year.  All the markets in the region
were lower save India and Australia.  Of note, Chinese shares tumbled hard
initially with the Shanghai off around 2.5% and the Shenzhen Composite down
more than 6% before a rally in late turnover.  The Shanghai finished near
its highs off 0.3%, while Shenzhen finished down 3.6%.  Reports that the
initial public offerings could be accelerated
weigh on sentiment as new supply loomed.  
equities are mostly lower while bonds are mostly firmer. 
 Following the DBRS downgrade of Italy before the
weekend, Italian bonds are underperforming.  Most sovereign yields are lower, but Italy’s 10-year is steady to slightly
(less than a single basis point higher)  while Italian bank shares are
surrendering half of the 3% pre-weekend gain.  The Dow Jones Stoxx
600 is off around 0.6% in late-morning
dealings, led by financials and energy.   
The euro has been sold to $1.0580 in the European morning, a
cent lower from the pre-weekend high. 
 In addition to the drag from sterling, the euro
appears to have been sold in response to
the interview in two European papers of the next US President.  Among
other things, Trump reported claimed that NATO was obsolete and that other
countries will leave the European Union, which is largely a German project.
 After being critical of US and Japanese automakers who export into the
US, Trump turned on BMW.  Trump also suggested he could be open to the
idea of lifting sanctions on Russia in exchange for a deal on nuclear weapons.
Last Wednesday
and Thursday, the euro recovered from about $1.0455 to $1.0685. 
 The $1.0570 represents a 50% retracement, and the
61.8% retracement is near $1.0540.  With US markets on holiday, the
intraday technicals warn of the likelihood of consolidation now.  
The dollar was sold to almost JPY113.60 in Asia, its
lowest level in nearly a month. 
 The greenback staged a recovery but
faltered near JPY114.50 in Europe.  The intraday technicals warn that the
market may be cautious until clearer signs emerge from the US Treasury market.
The dollar-bloc
currencies did well last week, but are trading heavily today. 
Of note, the price of Brent oil is a little firmer but
remains in the narrow range established last Thursday.  Iron ore prices in
China continue their New Year rally.  Today’s 7.6% jump brings the
year-to-date advance to almost 20%.  

Most emerging
market currencies are moving lower against the dollar. 
 The notable exception is he Russian ruble which is posting a small gain (~0.3%). The Turkish
lira, South African rand, and Mexican peso remain under pressures.  The
beleaguered Turkish lira had rallied at the end of last week as the central
bank drained liquidity.  The dollar is recouping about a third of its two-day


Hard Exit Talk Sent Sterling Below $1.20
Hard Exit Talk Sent Sterling Below $1.20

Reviewed by Marc Chandler

January 16, 2017

Rating: 5

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