GBP in torment as Brexit risk revives
After reaching its highest range in early May amid hopes of a swift arrangement between both leading parties Conservatives and Labor, it appears that the British pound loses sight. Nervousness over upcoming EU parliamentary elections is felt, as recent polls are favoring Nigel Farage’s newly formed Brexit party with a majority of 34% while both historical leading parties are ranked second (Labor party: 21%) and fourth (Tories: 11%), alongside with pro-EU Liberal Democrats (12%), thus rising risk of a potential disorderly Brexit looking forward. Yet the UK is certainly not an isolated case where we should see unconventional parties taking the lead (i.e. Italy, Austria, France, Germany, Denmark or Finland, not to mention others).
There is therefore good reasons to consider downside risk for GBP as a hard Brexit would have extreme consequences on the currency. Furthermore, the recent labor data releases are not particularly rejoicing. Despite an unemployment rate of 3.80% in March, lowest since 1974, wage growth of 3.20% (prior: 3.40%) shows signs of weakness while the monthly staff demand index from Recruitment and Employment Confederation and accountants points to 53.6 (prior: 55.5) in March, its lowest level since August 2012, suggesting that the robust labor market is losing pace.
We would therefore favor a GBP bearish bias. GBP/USD lost -2.55% since its high from 3 May 2019 (1.3173). The pair is approaching support at 1.2803 (14 February 2019 low).
AUD slides temporarily amid disappointing job report
The Australian dollar slid to the lowest since January 21st 2016 – if we discard the flash crash from January 2nd this year – amid disappointing job figures. The Australian dollar fell as low as 0.6893 against the greenback after the unemployment rate rose to 5.2% in April, leaving it at the highest level since August last year. The slight increase in the participation rate from 65.7% to 65.8% can’t solely explain the move as the number of full time jobs contracted by 6.3k, while labour market underutilisation rose by 34.7k.
A week ago, the Reserve Bank of Australia decided not to lower the Official Cash Rate and maintained it at 1.5% while most economist anticipated a reduction of 25bps. However, the tone of the statement was slightly dovish as it reiterated the view that the outlook for the global economy is “tilted to the downside”, while the outlook for household consumption remains the main domestic uncertainty. However, the RBA remained relatively optimist regarding the growth outlook. Despite this relatively enthusiastic statement, we believe that Philip Lowe is much closer to announce a cut than a raise. In addition, the RBNZ cut rate last week; therefore there is a solid probability that the RBA will walk in Adrian Orr’s footsteps.
Speculator are still net short Aussie and a continued to increase their positions. As of last last, total net short position reached 26% of total open interest (futures only). Given the likelihood of the RBA cutting rate at its next meeting in early June, we believe that the Aussie has room for further debasement with 0.6850 as next target. Nevertheless, investors should keep in mind that the Australian dollar is extremely sensitive to US-China trade war developments – as 35% of Australia’s export go to China – meaning positive news may trigger sharp upside moves.
