Perhaps Sterling Bulls Should Get Crossed?
Even though, as one US bank noted earlier in the week, “the 10-year yield gap between US and UK government paper stands at its least supportive level for GBP since October 1984 (when GBPUSD was trading around 1.24)” it was notable on Thursday that, while the USD made broad gains on the currency markets against a backdrop of elevated US Treasury yields across the curve, sterling held its own on the crosses. Indeed it rose against a number of major currencies. Perhaps sterling’s performance versus the yen yesterday (GBPJPY) owed more to JPY weakness than to GBP strength, or perhaps markets were also focusing on mooted corporate takeover activity and the prospect of associated GBPJPY demand. It almost doesn’t matter, the reality is that the pair edged higher. But GBPJPY was not alone.
The pound also held its own versus the likes of the euro, the Swedish krone and the Swiss franc. Certainly in the case of GBPSEK, it was post-Riksbank SEK weakness that was the key driver while Thursday’s “nothing to see here” approach from the European Central Bank arguably eventually translated into a weaker euro versus the US dollar (EURUSD) which spilt over into a lower EURGBP. Either way GBPSEK rose and EURGBP slipped a little.
Equally the move up in GBPCHF could be ascribed to CHF weakness (versus the USD through USDCHF) spilling over into sterling/Swiss, it doesn’t really matter. The fact is that GBPCHF headed higher. On Thursday in Europe, the pound also performed reasonably well versus the currencies of Australia, Canada and New Zealand (GBPAUD, GBPCAD, GBPNZD) even if initial gains later eroded somewhat. With the US dollar currently deriving such strength from the spike in US yields, sterling bulls could be forgiven for avoiding cable (GBPUSD) but, as the price action on Thursday seemed to indicate, that doesn’t mean there’s no value in the GBP crosses.
Written by Neal Kimberley, External Currency Analyst.