When the market starts gunning for sterling, nobody goes broke going short

Outlook:

Since Asia is the only place open for business today, we can talk about Asia. Japan got no inflation, as expected, raising expectations for something, anything, on the policy front going forward.

In China, the BPOC continued to respond to the stronger dollar by setting the fix a little lower for a cumulative 0.9% this week, which is rather a lot. The FT reports “it’s the biggest percentage drop since the first week of January, when a 1.1 per cent depreciation fuelled a wild sell-off in global financial markets. “Analysts at HSBC note that the fluctuations in the renminbi fixings over the past week or so have in-creased in size. ‘We believe its sensitivity to overnight movements in major currencies has risen, especially when the US dollar is broadly stronger. If sustained, this latest subtle change in the fixing pattern could highlight the PBoC’s intention to introduce greater FX flexibility. We believe the PBoC has seized this opportunity of relative calm in the global financial markets to introduce greater two-way volatility in USD-Rmb.’” This could imply that the days of one-time Shocks are ending.

If anyone is working today at all, they should be considering next week’s events and data. On Friday we get payrolls. Before then, a speech by Yellen at the NY Economic Club will be a focus, with some hot-shot economists in the audience to provide provocative questions (including NY Fed Dudley). We really want Yellen to define what “global conditions” will let her loosen the reins. We speculate that it will be Mr. Draghi saying again that no further initiatives are needed, although the last time he said that, it had to be dialed back.

We long for normalization.

On the US political front, Trump is covering himself with muck instead of glory but that has not harmed him so far. One comment in particular that offends is his remark that it’s the US managing Russia in the context of the Ukraine. Chancellor Merkel must be furious (or laughing). A NYT opinion piece points out that there is no such thing as a Trumpian movement, just a celebrity cult around the one guy. It’s not clear this should be reassuring.

Do not trade. Clean your desk. We could easily get a countermove upward in the euro when Europe returns on Tuesday to offset the drop this week—a classic Tuesday pullback. We almost always lose our shirts trying to trade it. If your pockets are deep enough to get over a few pullbacks, the place to bet is sterling. It may be a few months before the referendum, but when the market starts gunning for sterling, nobody goes broke going short. We would not be at all surprised to see 1.3000 before this is over. Maybe more. Remember the GBP was near parity to the dollar in Feb 1985.