Currencies struggling to find cohesive direction

Our prop desk is finding some profitability off the back of long GBP positions with some of the less common crosses coming into play, including CAD and NZD. Short S&P and long USD/CHF trades remain in play.

Daily round up

Fundamental data is relatively thin on the ground today as European traders return from the long Easter weekend break. There are some building stats due for release from the US, but the key drivers seem to sit very much at the political level. These include factors such as the looming French election and how US foreign policy will play out next. We do however seem to be moving into a phase of more complicated price action than we’ve seen in recent weeks.

Fundamentals – currencies struggling to find cohesive direction

EUR/GBP is testing levels we haven’t seen since late February as caution surrounding the outcome of the French Presidential elections takes a toll on confidence for the common currency. Investors are looking to de-risk Euro exposure, but given the general backdrop of geopolitical uncertainty we have right now, the safe havens are few and far between. This appears to have pushed the pound into favour coming out of the long weekend break in Europe, although sustaining these gains in the medium term could prove difficult. With little fundamental data due for release today that will drive either currency, it’s really going to be any update on French voter sentiment that has the potential to provide the most meaningful direction here in the short term.

Gold prices are retreating slightly following the long weekend, with the fact that the North Korean situation didn’t escalate further over the weekend alongside hopes that a diplomatic solution can be found here helping cap the rally short of the $1300/oz level. Comments by the US Treasury Secretary Steve Mnuchin which went against Donald Trump’s calls late last week that the greenback was too strong have also helped here, with the dollar index once again finding some space above the 100 mark. Again however this serves as a good illustration of the complex web of fundamental factors that are each likely to continue playing a part in driving asset prices in the months ahead – we appear to be moving into a period where it’s far from being a clear-cut game.

The Aussie dollar floundered off the back of the release of RBA meeting minutes overnight, which revealed a cautious mood at the central bank. A weaker than expected labour market is keeping wage pressures in check and this is in turn reigning in inflation. With little indication of a need to tighten monetary policy - other than perhaps to reign in house price inflation and consumer debt – that rally we saw for AUD/USD at the end of last week, inspired by Trump’s talking down of the greenback already seems to have run out of steam.

Volatility continues to prevail in terms of US equity indices with the S&P having already recovered yesterday’s losses. The big potential drivers here again remain those expected policy announcements from the Trump administration, including the idea that we may see a tax holiday to encourage US companies repatriating cash. If this progresses then the resulting slew of M&A activity alone would likely be sufficient to give equities another shot in the arm, although underlying P/E ratios would be left looking even more toppy. The sell-off has to come at some point – this very much remains a question of when, not if.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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