Morgan Stanley said that compared with the Japanese yen or the euro, the British pound is more vulnerable to large-scale capital flows and its trading pattern is more similar to some currencies that are far less liquid than the yen or the euro.
The bank’s currency analysts found that both the Japanese yen and European currencies could absorb a $1 billion transaction with little change in price.
But they say that a deal of this scale could cause volatility in spot prices, and for the pound (the world’s fourth-largest currency), the magnitude of such fluctuations could be surprisingly large, similar to the situation with the Swiss franc or the New Zealand dollar, whose trading volumes are significantly lower.
Strategists such as David Adams, Andrew Watrous and Zoe Strauss wrote in a research note published on Thursday that the pound “may not be able to absorb as much market capital as investors imagine”.
According to the latest data from the Bank for International Settlements (BIS), the euro and the yen account for 31% and 17% of foreign exchange transactions respectively, while the trading volume of the pound is approximately 13%. However, the trading volume of the pound is still much higher than that of other currencies with similar liquidity.
Analysts say the research findings indicate that global investment flows play a crucial role in currency exchange rate fluctuations, which are usually believed to be mainly driven by cross-border trade flows.
Morgan Stanley strategists said: “Capital flows can be said to be the key factor driving exchange rates. Investors drive exchange rates, and exchange rates drive trade balances, not the other way around.”
They said that the reason for the low liquidity of the pound also lies in the fact that the price level varies depending on the trading location and time. For instance, transactions executed in the later part of the London trading session have a greater impact on the pound’s price.
Morgan Stanley’s analysis is based on a liquidity-seeking algorithm of the bank, which calculates the transaction costs of hypothetical orders placed by clients in the interdealer market. The data was collected during the period of the strongest liquidity in the money market, namely from 8 a.m. to 12 p.m. New York time, which is the overlapping period of the trading sessions in London and the United States.
Technical analysis:
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Gold: As we mentioned in the alert yesterday, after the liquidity sweep in the yellow area, we should look for a rebound signal. Then, for the buy entry after the pullback from the blue area break, we didn’t enter yesterday. Today, we still maintain the plan to buy after the pullback near 3640. For the exact position, please consult the plugin.
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Nasdaq: If the short-term price can break through its own platform, we will continue to maintain a short-term bullish position. Pay attention to the profit-loss ratio and advance protection at a 1:1 ratio. Additionally, after sweeping the liquidity near 23800, capture the rebound signal. For detailed positions, please consult the plugin.
(NASDAQ 15-minute chart)
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Crude oil: After the price dropped below 63.15, it continued to decline to a level below 62. There is no sign of stabilization yet. It is recommended to wait and observe for a day today and wait for a clearer signal to appear. For detailed positions, please consult the plugin.
(Crude Oil 15-Minute Chart)
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Key economic data and events to focus on today:
14:00 UK July industrial output (year-on-year)
14:45 France August Consumer Price Index (MoM) Final Value
22:00 Preliminary September University of Michigan Consumer Sentiment Index for the United States
