Chaos and anarchy in the UK and financial markets

Mar 19, 2020

Morgan Stanley and Goldman Sachs announced the start of a global recession, and chaos in the financial markets, meanwhile, continues.

The most significant events of yesterday were the epic drop of the pound by 600+ points to the lowest levels in modern history (since 1985), as well as the decline in oil to the lowest level in the last 15 years.

Everything is clear with oil, the fall is logical and expected. But why did they beat the pound is not entirely clear.

Yes, the dollar is now extremely strong and dominates the foreign exchange market. But the dynamics of pound cross-rates shows that not only the dollar is to blame for the decline in the pound, there is a significant proportion of its own weakness.

The reasons for the decline, voiced by analysts, are generally unconvincing. One of the main versions is concerns about the economic consequences of coronavirus. In our review yesterday, we wrote that the Eurozone will suffer harder and faster, but the euro against the pound is growing, so the argument, in our opinion, is not convincing. The arguments about the possible failure of trade negotiations between the EU and the UK are also untenable, just because the negotiation process is still in progress. The change in the course of the British authorities regarding the fight against coronavirus also does not hold water in terms of the extent of the fall of the pound.

In total, we do not see any clear arguments in favor of a further decline in the pound vs euro. And although in the current conditions it is akin to suicide to go against the market, we continue to consider the sale of the EURGBP pair a great deal, and the current price of the pair is an opportunity to add to existing positions.

Note that yesterday we added to the purchase of oil - everything is according to the plan: the first purchase at $30, the second with an increased volume at $25 and the third at the bottom $20. This is a medium-term deal designed for the price war to have a limited time frame.

The strength of the dollar is the reason for its future weakness. Trump is not in vain constantly criticized the Fed for a strong dollar. In the current environment, this is extremely destructive phenomenon for the US economy. Therefore, we consider the potential for further growth of the dollar as limited. So, it's time to get ready for its sales. Ideally, of course, we should wait until his booming growth subsides. In principle, Mnuchin's statement about 20% unemployment in USA is a good reason for markets to think about whether it is time to stop buying dollars.