Investors see GBP bottom despite flash crash

Contrary to the GBP flash crash on Friday last week, short GBP ETPs have seen outflows, totalling US$12mn.

The flash crash for Sterling last week highlights the volatility that thin liquidity and computerised trading algorithms can have on currency markets, after a sharp 6% decline pushed Sterling to 31-year lows.

Investors in the ETP space have started to believe that GBP was making a floor, based on fund flows. Currency ETPs tracking short GBP exposures recorded the most significant outflows in two months, with US$12mn withdrawn last week.

Meanwhile, inflows into ETPs tracking long GBP exposures were the largest in over two years, since June 2014, recording over US$3mn last week.

Long US Dollar ETP inflows were the highest in a month. Investors maintained their faith in the US Dollar (and the Fed to hike rates in 2016), with US$10.2mn of inflows.

Expectations for a rate hike in December have risen to 64% from 59% at end-September, while positions in futures markets show that net long exposures have softened by 1% over the past week.

Investors flee crude at fastest rate in nearly two months, as oil prices stall at US$50/bbl. OPEC comments from the International Energy Conference reiterating the cartel members’ optimism about forming an agreement to cut crude oil production appear to be having less impact, as oil prices begin to stall around US$50/bbl.

Profittaking by investors has seen US$71mn withdrawn from crude oil ETPs over the past week, the fastest pace in seven weeks.

Gold ETPs receive third consecutive week of inflows, totalling US$57mn last week. ETPs tracking long gold have received inflows in 11 of the past 12 weeks, indicating that investors remain cautious about the global economic outlook and the impact that monetary policy is having on global fiat currencies. Cumulative inflows over the past three months have amounted to US$1.1bn.

However, futures market positioning indicates that gold’s support may be fading, with long positions being cut by 15% to the lowest level in four months. Meanwhile, silver ETPs recorded modest outflows after a near 11% plunge in prices over the past week.

Key events to watch this week. With US jobs failing to meet expectations last week, investors will be focussing on Fed Chair Yellen’s speech on Friday after scrutinising the FOMC minutes on Wednesday regarding the potential for a December rate hike from the Fed. US equities earnings season begins again this week, with questions over the robustness of the US sharemarket rally likely to be clarified. Additionally, US retail sales will shed light on whether consumer strength can hold up in the currently uncertain economic environment.

Martin Arnold, director, FX strategist at ETF Securities

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