Flogging a bit more Sterling is the trade of the day ......

Tuesday 20th September 2016

Flogging a bit more Sterling is the trade of the day ......

ref :- "Brexit-Battered Pound Emerges as Favored Short Before Fed" , Bloomberg Markets

Traders may be largely sitting on their hands in advance of  tomorrow's two policy announcements from the Bank of Japan and the Fed, but they're not so twitchy that they can't get off them long enough to sell a few more British Pounds. GBP / USD is back below 1.30. whilst GBP / EUR is also making 1 month lows below 1.16

Such action is not entirely unrelated to the central banks' decisions (very little is, these days) but actually the main reason behind the move can be found in the figure of the Czech State Secretary for EU Affairs, Tomas Prouza. We would hazard a guess that Mr Prouza has only rarely been a centre of market attention but it was his statement late on Monday that the UK had "zero chance" of clinching an exit deal that included both immigration curbs and free-market access that prompted the latest wave of Sterling selling.

Truth be told, Mr Prouza is just the latest of a number of east European figures who have been queuing up to issue this kind of warning. If their motivation is nakedly self-serving  --  they want the UK to compromise on those immigration curbs and by doing so to continue to offer eastern Europeans opportunities for work  --  it probably reflects the opinion of the vast majority of EU nations even if their rationales may vary.

The thinking goes that something will have to give, and that we're more likely to see the UK's free-market access curtailed rather than any watering down of immigration restrictions from a UK government operating under a Brexit mandate. That'll be bad for the economy, they say, and hence the move lower for the Pound on foreign exchanges.

With regard to the central bank policy decisions, Sterling has come under further pressure as it's current weakness has made it the currency of choice to sell when hedging against any surprise move by the Fed (which would automatically bring about a jump in the dollar, one assumes). But haven't we just about written off the chances of a rate hike after all the weak data ? Well no .... it does look like a very long shot now but markets give it a one in five chance.  Two of the Fed's 23 preferred primary bond-dealing partners, BNP and Barclays, have been brave enough today to re-assert their belief that the Fed will surprise the market by taking action. So you'd have to say there's still a chance, but a slim one. Probably no hike then, but all will be listening intently to the accompanying statement for signs of more hawkish intentions by year-end. Failure to send that kind of signal really would begin to undermine faith in the Fed. Decision and statement due tomorrow at 19.00 hrs . BST

And the Bank of Japan ? Who knows ..... on balance the expectation is for the BoJ to do SOMETHING , but nobody is too certain quite what. A cut in the discount rate from -0.1% ? An expansion of QE asset-buying and a move to shift purchases further toward the shorter end of maturities (to steepen the yield curve) ? The BoJ has a history of surprises and in many ways this is the much the more interesting of the two decisions ..... unless of course the Fed really does pull a fast one. Anyway, the timing of the BoJ's decision and statement is never precise  ..... let's just call it the VERY early hours, BST.