Currency Note

Red Apple not so rosy

By Smart Currency January 3rd, 2019

The first trading day of the year did not disappoint for excitement, action and volatility.
PMIs from across the world confirmed the slowdown in the global economy, and once again we saw extreme volatility in the US equity market as the Dow dropped 600 points,
rallied back all the way before ultimately dropping again, an 1800 pip or 7.8% round trip.

The catalyst for the final leg down, and a flash crash in currencies, was the after hours announcement by Apple, for the first time in history, about lower sales. CEO
Tim Cook said that the slowdown in the Chinese economy in the second half of 2018 had impacted revenues, now revised to $84billion for the quarter ended December, down
from an expected $93billion. Apple shares tumbled about 7%, wiping fifty five billion dollars off the company’s value. With Tokyo closed for a holiday there was almost
no liquidity as the US closed, and currencies went into a tailspin.

The US dollar dropped more than 300 pips, or 3%, against the Japanese Yen in a matter of minutes, before recovering, as many other currencies lost ground against the
dollar. But this paled in comparison against the Australian dollar, which fell 480 pips, an eye watering 6.3% in less than 10 minutes. We still think there is a lot of
risk to the global economy, and last night shows us all that no matter how far away they may feel, these events still have the potential to impact business and markets
here at home.

GBP: Manufacturing PMIs come in above expectations

We saw UK manufacturing PMIs hold up better than some European releases, coming in at 54.2 against expectations of 52.5. However a lot of the outperformance was
explained by companies stockpiling ahead of Brexit, so there was little benefit to the pound. Despite better news from John Lewis about December sales, as the day wore
on the dollar gained strength, with GBPUSD stabilising initially at 1.2580 before the Flash Crash hit.

Despite the fact it was an American company having a hard time in China, the pound still slipped over 200 points in 30 minutes, before staging a recovery back towards
1.2580 again. The message seems to be that economic data is largely being ignored for the time being and that general risk is spurring excessive moves at the start of
the year.

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EUR: PMIs show economy continuing to struggle

European PMIs all painted a picture of the economy continuing to struggle. The euro sold off from the highs but then accelerated lower as news came out that the ECB had
appointed administrators to Banca Carige. Despite being a rather small Italian bank, the headline spooked the market as fears of problems in other Italian banks
resurfaced, sending the euro down 150 pips to 1.1320 through the day.

Ironically though, once the really choppy price action started elsewhere, EURUSD traded within a tight range and the euro has subsequently rallied 75 pips from the
overnight lows. Possibly in a world of bigger and bigger problems the ones facing the Eurozone at the present time are not considered that serious.

USD: Dollar has a good day against the majors

In a typical ‘Risk’ move the dollar had a good day against almost all of the majors, except the Japanese Yen. Despite a meeting between Democrats and Republicans the
Government remains in partial shutdown as President Trump continues to hold out for his money for the wall. Apple’s announcement highlights the slowdown in the Chinese
economy, almost certainly impacted by the trade war between the US and China, while adding to the problems for the global economy. We continue to be cautious about
downside for the dollar while there is so much instability, history shows that when really serious problems occur the US currency generally tends to outperform.

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