Investing

The British pound has been hammered to fresh lows just above $1.3115.  The euro is moving toward GBP0.8500.  The immediate catalyst is three-fold.

First, one of the UK's largest property funds has moved to prevent retail liquidation. Second, the BOE reversed an earlier decision on the capital buffer for banks, which is tantamount to easing policy by boosting the banks' lending capability by as much as GBP150 bln.  Third, UK services PMI was weaker than expected.

In the sessions before and after the UK referendum speculators in the currency futures did three things. First, they generally reduced exposure.  This means gross longs and short positions were reduced.  Of the 16 gross speculative currency futures positions we track, 12 fell.

Some observers argue the media and some economists are exaggerating the impact of the UK vote a week ago. They talk about the petition for a second referendum. They talk about Scotland vetoing the decision to leave the EU.  They talk about the UK never invoking Article 50 and rehash all the ways the EU has subverted the popular in recent years. 

The CFTC reporting week ending June 21 covers the day FOMC and BOJ meetings and ends two days before the UK referendum. The overarching theme was the reduction of exposure.  This is not measured by net positions but by gross positions.

Of the eight currencies we track, six saw a reduction of gross long positions and a six saw a reduction in the gross short positions.  Five of the eight currencies showed a decline in both long and short positions.

The dramatic reaction to the UK decision to leave the European Union has changed the technical condition in the foreign exchange market.  While the precipitating factor is a fundamental political development, it is mediated by psychology.  Group psychology is the subject of technical analysis.  In the current context, the technical analysis puts the price action in the larger context and provides mile-markers, as it were, and potential inflection points.

Sterling is recording its daily advance since 2008 today.  It is up about 2.3%.  The ostensible driver is the weekend polls suggesting that, as we suspected the murder of the UK MP acting as a catalyst of sorts for public opinion.  The odds makers in the betting houses and the events markets have also shown a shift toward remaining in the EU. 

Since the murder of UK MP Cox last week, the mood in the markets shifted.  Today is the continuation what was seen in the last two sessions last week.  The difference is that participants seem more confident, as the polls and betting odds seem to support our initial recognition of the tragedy's potential to impact psychology. 

In the days ahead of the murder of Jo Cox, a UK member of parliament, apparently for her support for remaining in the EU, speculators in the futures market scooped up sterling.  They added 25.4k sterling contracts to lift the gross long position to 61.7k contracts.  This is the second largest long speculative position after the mid-March holdings of 62.9k long contracts.

The US dollar recovered from the sell-off sparked by the poor employment data released on June 3. It continued to move higher after the Federal Reserve met and shaved its forecasts for the next year and 2018.  The number of Fed officials that think only one hike may be appropriate this year increased from one in March to six in June.

The market is discounting less than a one in 10 chance of a July hike, though an upward revision to the May jobs data coupled a robust June report would likely see the perceived risks increase.

We have a lot of power with China. We can’t continue to allow China to rape our country, and that’s what they’re doing.

– Donald Trump, May 1, Fort Wayne, Indiana