Sterling climbing on the back of Trump? Go figure .....

Friday 11th November 2016

Sterling climbing on the back of Trump? Go figure .....

ref:- "Pound Emerges as Surprise Winner in Aftermath of U.S. Election", Bloomberg Markets

Look, it's been a long and historic week ..... get some rest at the weekend, why don't you? Of course, that may not be so easy for those who are not convinced by idea of Trump as Conciliator  If you believe that liberal democracy itself is under threat (as some do, apparently), an apparition of the Donald in your slumbers is only likely to turn your dreams to nightmares ..... mind you, that particular mental image might give even his most loyal supporters a bit of a jolt in the midnight hours. So if you need one final question to ponder whilst awaiting sleep's warm embrace, try this one.....

"Why exactly is the British Pound the biggest beneficiary of a Trump victory?"

Admittedly, you could argue that in the context of the week's developments Sterling's progress could only be of  interest to a narrow band of traders and investors who really should be looking at the bigger picture. But for anyone who might fall into that slightly sad demographic (who could they be?), it's well worth a look.

You won't be at all surprised to learn that of the 31 most-traded currencies, Sterling was by some distance the very worst performer in October. Yet over this momentous week, it has been the very best, You can bet that not many had that at the top of their list of likely effects of a shock Trump win. To give you an idea ..... taking absolute lows set in the early hours of Wednesday morning, and absolute highs posted a little earlier today, GBP / USD (aka "Cable") has risen from 1.2360 to 1.2670. The move in GBP / Euro is even more extreme: 1.1080 to 1.1660. What's going on?

The biggest story of the week (market-wise, that is) is the surge in bond yields ..... or if you prefer, the fall in bond prices. We don't need to go over that one again at any length  ---   in one sentence, Trump's plans for growth (increased fiscal spending, tax cuts etc) are inflationary and he'll also need to issue more bonds to pay for it all whilst the trade conflicts he is likely to provoke will also be inflationary for the US consumer). Anyway, commentators are pointing out that while yields on US Treasuries are being seen as leading the field, yields on UK Gilts have actually risen further (true, but not by much), and from a lower starting-point (now that IS true). This closing of the yield gap accounts for at least some of the reversal of Sterling's precipitous decline. Fair enough, but there must be more .....

Okay ..... The fact that the pound has rallied even more against the Euro than the Dollar is significant. We've touched a few times on what a Trump victory means for Europe, and if you're a EU heavyweight then the answer is "nothing good". The stunning accession of this arch-populist to the most important job in the world sets the worst possible tone for a raft of European leaders whose own positions will be under threat from populist parties in a series of votes starting next month. Simply put, the EU is in a vulnerable position and therefore the Euro is vulnerable too. The unwinding of short GBP / long Euro positions has been giving the British unit real momentum.

And talking of unwinding positions ..... beyond all or any of the fundamental reasons why people might be buying Sterling,  market positioning may play the biggest role of all. After the Brexit vote on June 23rd, and in moves exacerbated by PM May's apparent desire for a "hard" Brexit, the world and his dog have been shorting the Pound against the Dollar, the Euro and just about any other currency you could think of. In market parlance, Sterling has been oversold, a condition verified by open interest reports of speculative short positions. When there aren't any fresh reasons to pursue the downward momentum, the "shorts" in a market such as this tend to get a little twitchy. And if some bullish factors emerge for whatever it is that's been shorted, (and we haven't even mentioned the increased chances of a "soft" Brexit after the High Court ruling), well ..... that's when you get panicky short-covering. The reactions are usually short, sharp and often extensive and that's what we're seeing here.

Will it last? A bit longer perhaps, but it's worth remembering that the prospects for UK Ltd have actually changed very little. Those shorts maintaining their positions will hope that the downbeat assessments will reassert themselves before long .... their may be that there is quite a big distraction at the moment and that's not going away anytime soon.

And so ..... Here's to a calmer week next week. Yeah, ....right!