A interesting article in FT Advisor recently discussed one of the hot topics in the currency markets at present: - When will the BoE raise interest rates? A BNP Paribas economist is betting on a May rise, stating that “if they don’t act in May then I don’t think they will be able to raise it later in the year.”
We set out Caxton FX’s view last week and we are sticking to it, steadfast and defiant; the BoE will raise rates in June.
Discussions about a UK rate rise in April were dashed this month by an unchanged March voting pattern within the MPC and a distinct shortage of hawkish rhetoric. An April rise was made yet more unlikely following the events in Japan and the UK growth downgrade in the government’s annual Budget. So what about May? A May rate rise is by no means beyond the realms of possibility. This month’s MPC minutes did express a concern that inflation could exceed 5% in the near term, suggesting this could be a benchmark past which the BoE will be reluctant to tolerate further escalation.
Inflation currently sits at 4.4%, the next UK inflation updates comes on 12th April, which will be the inflation figure on which the May 5th BoE interest rate decision will be largely based. Therefore (stay with me), the inflation figure for April would have to increase by 0.6% for the MPC to finally be forced into biting the bullet on a rate hike. A month-on-month inflation increase of 0.6% has not been seen in over a year; it’s not unheard-of but the odds are that it won’t. This is all a bit statistical but it does suggest a May rate rise would be a surprise.
Perhaps more convincing is the argument that the MPC will remain in wait-and-see mode. The majority of policymakers want evidence of a stronger economic recovery. Indeed, we have seen sterling suffer in the past fortnight as sentiment towards the British economy has soured. The present outlook for UK GDP is weak and recent retail sales figures and consumer confidence data set alarm bells ringing. For a May rate rise, we imagine that a clean sweep of positive UK manufacturing, services and construction data would be required, in combination with an encouraging first quarter UK GDP announcement on April 27th. Whilst we do see negative perceptions of the UK economy as somewhat overdone, we are unconvinced the MPC will get the economic indications they are stubbornly waiting for.
In addition, we do not expect a further change in the voting pattern at the MPC’s April meeting – who are the fourth and fifth voters going to be I ask...? Two more MPC policymakers would have to be recruited to Andrew Sentance’s hawkish camp in the space of one month. Again this seems improbable; there have certainly been no indications of any further MPC hawks emerging in recent policymaker speeches.
There is also a political reason for delaying the rate rise. UK local elections are being held on 5th May and it seems unlikely that the MPC will announce a rate rise that would affect the political process, particularly as it would be detrimental to the incumbent Conservative government with whom the BoE work so closely.
As for the “May or not at all” comment, which the FT referred to... this really makes little sense, there will of course be a rate rise this year, there is nothing about the month of May that constitutes a deadline.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday 31 March 2011
Wednesday 30 March 2011
Should Portugal just bite the bullet and seek annexation by Brazil...?
So suggests an interesting article on the Financial Times website today.
The context: The current strength of the euro reveals that the markets are not overly concerned with the Portuguese debt crisis at present, or indeed with the eurozone debt problems in general. This remains the case despite almost daily news of credit downgrades to peripheral nations; most recently Greece and Portugal. With a decision on the EU bailout fund delayed until June, the debt crisis is unlikely to be resolved any time soon.
The unstable fiscal situation in Portugal is so bad that an interview on the Financial Times website mooted a highly controversial solution. It was argued that Brazil, Portugal’s former colony, should annex the struggling Iberian state. Portugal is a very low growth, high deficit economy with major governmental issues (currently doesn’t have one!). Brazil’s economy, by contrast, is set to boom again this year and is so large (in total GDP at least, not per capita) it could accommodate Portugal’s substantial and crippling debt with little trouble.
Granted, the comment was ‘tongue-in-cheek’ and was clearly designed to provoke a reaction. Such a solution is totally unprecedented and quite plainly there is no willingness from either nation to allow such a dilution to their national identities.
Nonetheless, the interview did treat the Portuguese issue with the urgency it warrants, and with the urgency we see returning to the markets. Our bet is that as soon as next week’s ECB rate rise is a thing of the past, market sentiment towards the debt issue will worsen and weigh on the euro accordingly. Already borrowing costs in the periphery are unsustainable; throwing in a 0.25% rise in the base interest rate is only going to send costs higher.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The context: The current strength of the euro reveals that the markets are not overly concerned with the Portuguese debt crisis at present, or indeed with the eurozone debt problems in general. This remains the case despite almost daily news of credit downgrades to peripheral nations; most recently Greece and Portugal. With a decision on the EU bailout fund delayed until June, the debt crisis is unlikely to be resolved any time soon.
The unstable fiscal situation in Portugal is so bad that an interview on the Financial Times website mooted a highly controversial solution. It was argued that Brazil, Portugal’s former colony, should annex the struggling Iberian state. Portugal is a very low growth, high deficit economy with major governmental issues (currently doesn’t have one!). Brazil’s economy, by contrast, is set to boom again this year and is so large (in total GDP at least, not per capita) it could accommodate Portugal’s substantial and crippling debt with little trouble.
Granted, the comment was ‘tongue-in-cheek’ and was clearly designed to provoke a reaction. Such a solution is totally unprecedented and quite plainly there is no willingness from either nation to allow such a dilution to their national identities.
Nonetheless, the interview did treat the Portuguese issue with the urgency it warrants, and with the urgency we see returning to the markets. Our bet is that as soon as next week’s ECB rate rise is a thing of the past, market sentiment towards the debt issue will worsen and weigh on the euro accordingly. Already borrowing costs in the periphery are unsustainable; throwing in a 0.25% rise in the base interest rate is only going to send costs higher.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday 29 March 2011
Conflict within the fed - what can we take from it all?
Monetary policy is incredibly loose in the US. Record-low interest rates paired with a second round of quantitative easing, have made the dollar a far less appealing prospect to investors. Now, in the past few sessions, noises coming out of the US central bank have started to change.
Several Federal Reserve policymakers have recently given indications that the Fed's second round of quantitative easing (QE2) will end in June. Some have hinted that QE2 could even be cut short before its scheduled June end-date, whilst others have remained coy – stating that they will assess economic conditions and the suitability of the policy closer to the time.
To clear up any confusion, US policymakers have all voted unanimously to maintain QE2 due to a convention of solidarity within the Fed. However, there are quite clearly differing opinions within the group. This contrasts with the situation in the BoE where we currently have a 6:3 split in favour of those voting to keep interest rates unchanged.
The dollar has underperformed all year; largely due to this loose monetary policy approach from the Fed. However, hawkish comments have boosted the greenback in recent sessions, pulling it up from multi-month lows against both the pound and the euro. So what are the long-term implications of this shift in rhetoric? Well, the US economy is looking in a significantly stronger positions than that of the eurozone and the UK. But crucially, the markets are not so interested in economic fundamentals at present; rather they remain focused on prospect interest rate differentials. .
Whilst comments made about curtailing QE2 have been dollar positive, the Fed has made no indications that it will raise rates this year. We can therefore only assume that it intends to tighten policy in early 2012. By contrast, both the ECB and the BoE are expected to raise their base interest rate twice - or even three times - in 2011, and for this reason we can only see the dollar underperforming, holding on to its steady downtrend over at least the medium term.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Several Federal Reserve policymakers have recently given indications that the Fed's second round of quantitative easing (QE2) will end in June. Some have hinted that QE2 could even be cut short before its scheduled June end-date, whilst others have remained coy – stating that they will assess economic conditions and the suitability of the policy closer to the time.
To clear up any confusion, US policymakers have all voted unanimously to maintain QE2 due to a convention of solidarity within the Fed. However, there are quite clearly differing opinions within the group. This contrasts with the situation in the BoE where we currently have a 6:3 split in favour of those voting to keep interest rates unchanged.
The dollar has underperformed all year; largely due to this loose monetary policy approach from the Fed. However, hawkish comments have boosted the greenback in recent sessions, pulling it up from multi-month lows against both the pound and the euro. So what are the long-term implications of this shift in rhetoric? Well, the US economy is looking in a significantly stronger positions than that of the eurozone and the UK. But crucially, the markets are not so interested in economic fundamentals at present; rather they remain focused on prospect interest rate differentials. .
Whilst comments made about curtailing QE2 have been dollar positive, the Fed has made no indications that it will raise rates this year. We can therefore only assume that it intends to tighten policy in early 2012. By contrast, both the ECB and the BoE are expected to raise their base interest rate twice - or even three times - in 2011, and for this reason we can only see the dollar underperforming, holding on to its steady downtrend over at least the medium term.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday 28 March 2011
Startup Britain - the launch
I’ve just returned from the Startup Britain launch (good to see it trending on Twitter by the way). I have to say I was impressed. Not only is it a good idea, but there seems to be a real buy in from the Government too, clearly they can see the financial importance of small businesses to the UK economy- according to the FSB small firms contribute more than 49 per cent of the UK turnover!
The Government have made some real changes to the tax structure to help small businesses and entrepreneurs recently. They are doing all the right things by creating an environment that promotes private enterprise - and there are a number of great initiatives to get young people setting up companies. Before the budget I was saying that the Government needs to incentivise with tax and then get out of the way - which is exactly what they are now doing.
Having said that, what we want to hear more about is how we can get more experienced people setting up on their own - not just an obsession with youngsters and start ups. The real growth will come from the development of existing smaller businesses with experience.
Rupert Lee-Browne
CEO
Caxton FX
The Government have made some real changes to the tax structure to help small businesses and entrepreneurs recently. They are doing all the right things by creating an environment that promotes private enterprise - and there are a number of great initiatives to get young people setting up companies. Before the budget I was saying that the Government needs to incentivise with tax and then get out of the way - which is exactly what they are now doing.
Having said that, what we want to hear more about is how we can get more experienced people setting up on their own - not just an obsession with youngsters and start ups. The real growth will come from the development of existing smaller businesses with experience.
Rupert Lee-Browne
CEO
Caxton FX
Ongoing cause for eurozone concern but sterling/euro levels set to remain until April 7th
In the wake of the EU Summit last week, and further eurozone developments over the weekend, now is a good time to discuss how on earth the euro can be performing so strongly and how long we can expect this continue.
At present the euro is trading at a five-month high against sterling, and is continuing to hold above the key $1.40 level against the US dollar, just 1.4% from its recent high reached early last week. This strong performance has seen the single currency shake off a series of peripheral debt and bank downgrades, record-high Portuguese bond yields on the back of the country’s government collapse, and ongoing concerns over the region’s bailout fund.
Why such resilience? The key attraction to the euro is that the ECB is due to raise its base interest rate on April 7th, well ahead of a June (at the earliest) BoE rate rise and an expected 2012 Fed rate rise. In addition, the euro is continuing to benefit from solid Eastern sovereign commitment to diversify reserves via the euro. For the time being the markets appear confident that the German and French economies are strong enough to pull the eurozone through the worst-case scenarios in the periphery. Ahead of April 7th, we doubt that the single currency will come under any prolonged pressure. However, it could well prove to be a turning point.
Following the ECB rate rise, the market may refocus its attention on Portugal and the lack of progress being made towards an underlying resolution. The EU Summit was marked as a deadline for the eurozone bailout issue, but this decision has now been delayed until June. Market disappointment was actually muted to this delay but frustration could yet re-emerge. In addition, over the weekend German Chancellor Angela Merkel lost another key regional election; if this is repeated and the markets lose confidence in German political resolve to spearhead eurozone debt aid, then much of the single currency’s recent appreciation could be ceded.
We are still sterling-positive on a longer-term view, though recent UK economic data may delay improvements in the rate.
As for the US dollar, a change in rhetoric from the Fed in response to higher-than-expected fourth quarter economic growth may have improved the currency’s outlook. It was indicated that the Fed will definitely be ending QE2 in June (and perhaps earlier…), though no indications have been made as to an earlier-than-expected Fed rate rise. Unless a Fed rate rise is brought forward to this year, we do not foresee a strong dollar performance even with an increasingly positive US economic outlook.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
At present the euro is trading at a five-month high against sterling, and is continuing to hold above the key $1.40 level against the US dollar, just 1.4% from its recent high reached early last week. This strong performance has seen the single currency shake off a series of peripheral debt and bank downgrades, record-high Portuguese bond yields on the back of the country’s government collapse, and ongoing concerns over the region’s bailout fund.
Why such resilience? The key attraction to the euro is that the ECB is due to raise its base interest rate on April 7th, well ahead of a June (at the earliest) BoE rate rise and an expected 2012 Fed rate rise. In addition, the euro is continuing to benefit from solid Eastern sovereign commitment to diversify reserves via the euro. For the time being the markets appear confident that the German and French economies are strong enough to pull the eurozone through the worst-case scenarios in the periphery. Ahead of April 7th, we doubt that the single currency will come under any prolonged pressure. However, it could well prove to be a turning point.
Following the ECB rate rise, the market may refocus its attention on Portugal and the lack of progress being made towards an underlying resolution. The EU Summit was marked as a deadline for the eurozone bailout issue, but this decision has now been delayed until June. Market disappointment was actually muted to this delay but frustration could yet re-emerge. In addition, over the weekend German Chancellor Angela Merkel lost another key regional election; if this is repeated and the markets lose confidence in German political resolve to spearhead eurozone debt aid, then much of the single currency’s recent appreciation could be ceded.
We are still sterling-positive on a longer-term view, though recent UK economic data may delay improvements in the rate.
As for the US dollar, a change in rhetoric from the Fed in response to higher-than-expected fourth quarter economic growth may have improved the currency’s outlook. It was indicated that the Fed will definitely be ending QE2 in June (and perhaps earlier…), though no indications have been made as to an earlier-than-expected Fed rate rise. Unless a Fed rate rise is brought forward to this year, we do not foresee a strong dollar performance even with an increasingly positive US economic outlook.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Friday 25 March 2011
A tough week for sterling fizzles out quietly, what’s coming next week?
After hopes for an early rate hike were raised by UK inflation levels at 4.4%, sterling has proceeded in the past four days to drop by 2% against the US dollar. Against the euro the pound has dropped by 1.6% to a five- month low. An unchanged voting pattern and dovish tones within the MPC’s minutes; a downward revision of projected UK GDP for 2011 (thank you Mr. Osborne); a threat of a UK rating cut, and some woeful retail sales figures all conspired to ensure sterling’s slide this week.
We remain optimistic that sterling’s fortunes will improve in coming months but for the next week at least the elusive catalyst to turn things around remains unseen. We might have thought that disappointing news from the EU Summit or the multitude of credit downgrades within the eurozone may have soured sentiment toward the euro. However, the resilience to the peripheral debt problems that we are seeing from sovereign buyers in the Middle and Far East makes us confident that euro strength is here to stay at least until April 7th.
This date will surely see the ECB raise interest rates, offering investors a higher yield compared to both the BoE and Fed, where rates are still a record lows. However once this date passes, this major appeal from which the euro has benefitted so much in recent weeks may well be consigned to the past, opening the door for some sterling improvements.
The best opportunity for the UK to gain a foothold next week comes on Friday, when UK manufacturing PMI figures are released. Nothing spectacular is forecast so sterling could well struggle to regain ground lost. Next week also brings US Non-Farm employment results, which as usual will have a big influence on risk appetite by clarifying the health of the world’s largest economy.
In the meantime, England fans remain grateful to Gareth Bale for pulling his hamstring.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
We remain optimistic that sterling’s fortunes will improve in coming months but for the next week at least the elusive catalyst to turn things around remains unseen. We might have thought that disappointing news from the EU Summit or the multitude of credit downgrades within the eurozone may have soured sentiment toward the euro. However, the resilience to the peripheral debt problems that we are seeing from sovereign buyers in the Middle and Far East makes us confident that euro strength is here to stay at least until April 7th.
This date will surely see the ECB raise interest rates, offering investors a higher yield compared to both the BoE and Fed, where rates are still a record lows. However once this date passes, this major appeal from which the euro has benefitted so much in recent weeks may well be consigned to the past, opening the door for some sterling improvements.
The best opportunity for the UK to gain a foothold next week comes on Friday, when UK manufacturing PMI figures are released. Nothing spectacular is forecast so sterling could well struggle to regain ground lost. Next week also brings US Non-Farm employment results, which as usual will have a big influence on risk appetite by clarifying the health of the world’s largest economy.
In the meantime, England fans remain grateful to Gareth Bale for pulling his hamstring.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday 24 March 2011
UK monthly retail figures vindicate MPC rate decision
Today’s UK retail sales data for the month of February suggest that the MPC was correct to keep the BoE interest rate fixed at 0.5%. The figure showed a 0.8% contraction in sales volumes, causing alarm bells to ring with regard to the UK economic recovery.
With consumer confidence at an all-time low (according to data compiled by Nationwide) and consumer prices at lofty heights, the poor sales figure is easily explained. Higher central interest rates would mean higher borrowing costs for the UK’s already heavily indebted consumer. So despite the shocking UK inflation data released on Tuesday, the MPC really cannot afford to tighten policy when the UK recovery is on a knife-edge. This may well convince those investors betting on a May BoE rate rise to adjust their positions.
What has this meant for sterling? Well, it has fallen across the board. A figure like this makes a rate rise for May all the less likely, particularly with yesterday’s MPC minutes displaying no significant increase in hawkish rhetoric. Furthermore it paints a gloomier picture of the UK economy moving forward, which was also brought into sharper focus yesterday as Osborne announced a downward-revision of the UK’s GDP projection for the year in during the annual Budget.
In addition to today’s sales figures, another factor adding to sterling’s decline has been some negative comments from Moody’s directed at the UK economy. The credit agency stated that the UK’s AAA rating could be cut if the government’s austerity measures threaten growth prospects. It seems a little cruel for the market to have responded so harshly to the comments given the rating cuts that have hit the eurozone left right and centre in recent months. Then again the pound does not enjoy the luxury of consistent demand from Far and Middle Eastern sovereigns looking to diversify their reserves.
Looking forward to next week, sterling has little on the horizon that looks likely to transform its appeal. We may have to wait until after the ECB rate rise (almost certainly on 7th April) for the pound’s potential to gain recognition. It will then be the BoE next in line.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
With consumer confidence at an all-time low (according to data compiled by Nationwide) and consumer prices at lofty heights, the poor sales figure is easily explained. Higher central interest rates would mean higher borrowing costs for the UK’s already heavily indebted consumer. So despite the shocking UK inflation data released on Tuesday, the MPC really cannot afford to tighten policy when the UK recovery is on a knife-edge. This may well convince those investors betting on a May BoE rate rise to adjust their positions.
What has this meant for sterling? Well, it has fallen across the board. A figure like this makes a rate rise for May all the less likely, particularly with yesterday’s MPC minutes displaying no significant increase in hawkish rhetoric. Furthermore it paints a gloomier picture of the UK economy moving forward, which was also brought into sharper focus yesterday as Osborne announced a downward-revision of the UK’s GDP projection for the year in during the annual Budget.
In addition to today’s sales figures, another factor adding to sterling’s decline has been some negative comments from Moody’s directed at the UK economy. The credit agency stated that the UK’s AAA rating could be cut if the government’s austerity measures threaten growth prospects. It seems a little cruel for the market to have responded so harshly to the comments given the rating cuts that have hit the eurozone left right and centre in recent months. Then again the pound does not enjoy the luxury of consistent demand from Far and Middle Eastern sovereigns looking to diversify their reserves.
Looking forward to next week, sterling has little on the horizon that looks likely to transform its appeal. We may have to wait until after the ECB rate rise (almost certainly on 7th April) for the pound’s potential to gain recognition. It will then be the BoE next in line.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday 23 March 2011
MPC Minutes dishearten investors but high hopes for change were misplaced
After a long time out of the spotlight, the UK again took prominence today as the minutes from the MPC’s March meeting were released this morning. In addition, we saw Chancellor George Osborne announce the UK’s 2011 budget earlier today. The former caught the eye but the latter left the market unperturbed.
Central bank interest rates are the real market-mover at present and an insight into policymakers’ views will always attract attention. The minutes revealed that Andrew Sentance’s hawkish camp failed to coax a fourth MPC member to join their campaign to increase interest rates. Had they succeeded in this, the outlook for a BoE rate rise as early as May would have been greatly improved, particularly in light of yesterday’s appalling UK inflation figures (4.4%!).
On release of the news, sterling dropped sharply across the board, and investors may well have been disappointed by the lack of any real increase in hawkish language adopted within the minutes. Indeed if anything, the tone reflected additional uncertainty following recent global developments, which will likely cloud the UK’s economic outlook.
Osborne’s budget announcement today contained a wide range of interesting material; the headline was probably Osborne’s downward revision of the UK’s growth forecast for 2011 to 1.7% (from 2.1% - itself an already downwardly revised estimate) but sterling has survived this hit relatively unscathed.
Sterling has actually lost little ground to the euro today as some bad news from the eurozone irritated the markets. It has been announced that the EU Summit this weekend will not be reaching a final decision on the ever-troublesome bailout fund. Given that the markets had grown in enthusiasm after initial progress at a preliminary summit, and that they would get a definitive answer this Friday, the delay of the decision until June seems to have frustrated euro-investors. Concerns have also mounted with regard to the Portuguese Parliament’s vote on its government’s austerity measures, which if rejected will almost certainly see its PM resign, and could well be the catalyst for a Portuguese bailout.
At present, sterling remains in limbo around €1.15 with another trigger needed to define direction.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Central bank interest rates are the real market-mover at present and an insight into policymakers’ views will always attract attention. The minutes revealed that Andrew Sentance’s hawkish camp failed to coax a fourth MPC member to join their campaign to increase interest rates. Had they succeeded in this, the outlook for a BoE rate rise as early as May would have been greatly improved, particularly in light of yesterday’s appalling UK inflation figures (4.4%!).
On release of the news, sterling dropped sharply across the board, and investors may well have been disappointed by the lack of any real increase in hawkish language adopted within the minutes. Indeed if anything, the tone reflected additional uncertainty following recent global developments, which will likely cloud the UK’s economic outlook.
Osborne’s budget announcement today contained a wide range of interesting material; the headline was probably Osborne’s downward revision of the UK’s growth forecast for 2011 to 1.7% (from 2.1% - itself an already downwardly revised estimate) but sterling has survived this hit relatively unscathed.
Sterling has actually lost little ground to the euro today as some bad news from the eurozone irritated the markets. It has been announced that the EU Summit this weekend will not be reaching a final decision on the ever-troublesome bailout fund. Given that the markets had grown in enthusiasm after initial progress at a preliminary summit, and that they would get a definitive answer this Friday, the delay of the decision until June seems to have frustrated euro-investors. Concerns have also mounted with regard to the Portuguese Parliament’s vote on its government’s austerity measures, which if rejected will almost certainly see its PM resign, and could well be the catalyst for a Portuguese bailout.
At present, sterling remains in limbo around €1.15 with another trigger needed to define direction.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday 22 March 2011
UK Headline inflation hits 4.4%: Where does the MPC draw the line?
This morning’s data revealed that UK inflation rose to 4.4% in February, a jump of 0.4% on the month, to the highest level since November 2008. In exceeding expectations, the increase in inflation has renewed the possibility of the BoE shifting interest rates, which has helped lift sterling but the market response has still been cautious.
Why? Mervyn King has already warned that inflation will rise towards 5.0% this year, which has taken the edge of an otherwise shocking increase. The figure also failed to realise rumours circulating of an even larger. Perhaps more importantly though, the data is just one of a series of important UK announcements this week, including the MPC’s minutes and UK monthly retail figures. Investors are likely to want a clearer picture of Britain’s economic conditions before taking up positions.
King has set his stall out in past announcements: he has recognised inflation is alarmingly high but asserts that it’s down to temporary factors which will begin to subside within a year. Moreover, King maintains that the dangers posed by a premature rate cut (which could risk pushing the UK back into recession), outweigh those posed by the current levels of inflation.
The market has fully priced in an August BoE rate rise but some are now leaning to a rate rise as early as May. We find this hard to believe even in light of today’s data, though if tomorrow’s minutes reveal an unlikely hawkish recruitment within the MPC, this argument will be far stronger. A rate rise in June remains our view. The pressure really is mounting on the MPC to slow down inflation - they are at risk of losing their credibility - particularly as the ECB are almost certain to embarrass the BoE by raising rates in a fortnight (inflation in the eurozone is only running at 2.4%!).
Following today’s data, sterling is currently trading at a fourteen month high against the dollar (near $1.64), though this has more to do with dollar weakness than with sterling-positive news. Despite a good day, the pound is still struggling against the euro at lows around €1.15. Looking forward, the risks for sterling are actually skewed somewhat to the downside; tomorrow’s UK budget release is unlikely to inspire the markets and the euro may make some more ECB rate hike-related gains - though these may be limited now that such a move has been largely priced in. Investors may also use sterling’s recent gains as an opportunity to take some profit.
What the pound needs is for Thursday’s UK retail sales data to be positive in order to reignite some confidence in the UK’s recovery, which in turn may convince a couple more MPC members that our economy can withstand monetary tightening. However, this seems somewhat unlikely given the forecasted 0.4% monthly contraction.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Why? Mervyn King has already warned that inflation will rise towards 5.0% this year, which has taken the edge of an otherwise shocking increase. The figure also failed to realise rumours circulating of an even larger. Perhaps more importantly though, the data is just one of a series of important UK announcements this week, including the MPC’s minutes and UK monthly retail figures. Investors are likely to want a clearer picture of Britain’s economic conditions before taking up positions.
King has set his stall out in past announcements: he has recognised inflation is alarmingly high but asserts that it’s down to temporary factors which will begin to subside within a year. Moreover, King maintains that the dangers posed by a premature rate cut (which could risk pushing the UK back into recession), outweigh those posed by the current levels of inflation.
The market has fully priced in an August BoE rate rise but some are now leaning to a rate rise as early as May. We find this hard to believe even in light of today’s data, though if tomorrow’s minutes reveal an unlikely hawkish recruitment within the MPC, this argument will be far stronger. A rate rise in June remains our view. The pressure really is mounting on the MPC to slow down inflation - they are at risk of losing their credibility - particularly as the ECB are almost certain to embarrass the BoE by raising rates in a fortnight (inflation in the eurozone is only running at 2.4%!).
Following today’s data, sterling is currently trading at a fourteen month high against the dollar (near $1.64), though this has more to do with dollar weakness than with sterling-positive news. Despite a good day, the pound is still struggling against the euro at lows around €1.15. Looking forward, the risks for sterling are actually skewed somewhat to the downside; tomorrow’s UK budget release is unlikely to inspire the markets and the euro may make some more ECB rate hike-related gains - though these may be limited now that such a move has been largely priced in. Investors may also use sterling’s recent gains as an opportunity to take some profit.
What the pound needs is for Thursday’s UK retail sales data to be positive in order to reignite some confidence in the UK’s recovery, which in turn may convince a couple more MPC members that our economy can withstand monetary tightening. However, this seems somewhat unlikely given the forecasted 0.4% monthly contraction.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday 21 March 2011
Long-term yen outlook and what it means for the Antipodeans
Over the past fortnight we have seen the yen initially benefit from strong repatriation flows, which will be needed to rebuild tsunami-torn parts of the country. We then saw an unprecedented move from G7 central banks to intervene and stem the yen’s sharp appreciation (yen hit a post-war high vs the US dollar), which indeed it did. Intervening in the market has historically been unsuccessful in permanently redirecting a currencies momentum, but with the global coordination of this intervention, things will likely be different on this occasion. After all, Japan is the world’s third largest economy and the global recovery is fragile; if Japan suffers, we all suffer.
The yen has little going for it at present. Its growth prospects are poor, which means that its interest rates are extremely low, and the Bank of Japan showed last week that it will print money to boost the economy when necessary. The intervention confirms what we already knew- the BoJ will not allow the yen to appreciate any further. With uncertainty surrounding the effects of the national disaster on the Japanese economy, investors are likely to look elsewhere for safety, such as the ever-appealing Swiss franc or gold. Sterling has had an excellent 2011 against the yen and we do not see this trend reversing, even if market sentiment towards the UK economy is mixed to say the very least.
So what about the kiwi and aussie dollars? The kiwi is in a similar boat to the yen. With an underperforming economy and a recent rate cut, those brave enough to invest in riskier currencies are turning to more promising prospects such as the euro. We therefore see a continuation of the Kiwi’s underperformance for the foreseeable.
On the other hand, the Australian economy is by no means performing poorly, but there is a sense that the aussie may struggle to build upon the gains made in the past couple of years. The aussie has benefitted from aggressive monetary tightening, but this process has slowed and the likelihood is that we will see just one rate hike this year (less than the BoE and the ECB’s expectations for example). Combine this with prevailing risk adverse sentiment and the hit to Japan (Australia’s second largest export market) and we do not see the aussie dollar enjoying too much more appreciation this year.
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The yen has little going for it at present. Its growth prospects are poor, which means that its interest rates are extremely low, and the Bank of Japan showed last week that it will print money to boost the economy when necessary. The intervention confirms what we already knew- the BoJ will not allow the yen to appreciate any further. With uncertainty surrounding the effects of the national disaster on the Japanese economy, investors are likely to look elsewhere for safety, such as the ever-appealing Swiss franc or gold. Sterling has had an excellent 2011 against the yen and we do not see this trend reversing, even if market sentiment towards the UK economy is mixed to say the very least.
So what about the kiwi and aussie dollars? The kiwi is in a similar boat to the yen. With an underperforming economy and a recent rate cut, those brave enough to invest in riskier currencies are turning to more promising prospects such as the euro. We therefore see a continuation of the Kiwi’s underperformance for the foreseeable.
On the other hand, the Australian economy is by no means performing poorly, but there is a sense that the aussie may struggle to build upon the gains made in the past couple of years. The aussie has benefitted from aggressive monetary tightening, but this process has slowed and the likelihood is that we will see just one rate hike this year (less than the BoE and the ECB’s expectations for example). Combine this with prevailing risk adverse sentiment and the hit to Japan (Australia’s second largest export market) and we do not see the aussie dollar enjoying too much more appreciation this year.
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Friday 18 March 2011
Crunch Time: EU Summit
Next Friday’s EU Summit marks a self-imposed deadline for eurozone leaders to reach an agreement on a “comprehensive package” to deal with the region’s fiscal problems. Progress was made earlier than expected at the preliminary Summit last weekend, and the markets responded positively – perhaps too positively if Trichet’s recent pessimistic comments are anything to go by.
Most significantly, EU leaders reached an agreement to expand the European Financial Stability Fund (EFSF). However, the more realistic tones coming out of the Summit are stressing that “the devil is in the detail” and whilst broad principles were agreed, the financial technicalities involved in actually implementing those principles pose a huge obstacle to concrete commitments.
Certainly, the enlarged bailout fund is a step in the right direction but it is more difficult for the EU member states to agree in what proportions they should contribute. One would assume larger states such as France and Germany would shoulder the burden but their national publics are growing tired of this ‘duty.’ Another issue surrounds the continuation of the ECB’s bond-buying role instead of allowing the EFSF to buy bonds on the secondary market, which Trichet feels particularly aggrieved about. Superseding all of this is the fact that the EFSF is set to expire in 2013, with the European Stability Mechanism to replace it, so agreement on the shape of this longer-term fund is paramount next week.
Coming into this month, the markets were cynical as to progress on EU debt issues. However, with Trichet turning up the heat on EU leaders (indicating borrowing costs would be increased in April with an ECB interest rate hike) we saw greater political commitment last weekend and increased market confidence followed. The euro has strengthened against the US dollar and sterling accordingly, despite several recent peripheral credit downgrades and very high bond yields.
It is possible that agreement on a “comprehensive package” next week will trigger a strong euro rally next week, persuading the markets that the eurozone debt problem can finally be put to rest. More likely though, in this risk adverse environment, is that the markets will greet an agreement positively but remain broadly cautious on the euro. Any gains will be incremental as markets await further proof that the situations in Portugal, Spain and Greece will improve. Sterling is likely to suffer against the single currency if the Summit is successful, at least in the short term, given that the ECB is almost certain to raise interest rates before the BoE. However, the pound should continue to outperform the US dollar, tracking euro strength.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Most significantly, EU leaders reached an agreement to expand the European Financial Stability Fund (EFSF). However, the more realistic tones coming out of the Summit are stressing that “the devil is in the detail” and whilst broad principles were agreed, the financial technicalities involved in actually implementing those principles pose a huge obstacle to concrete commitments.
Certainly, the enlarged bailout fund is a step in the right direction but it is more difficult for the EU member states to agree in what proportions they should contribute. One would assume larger states such as France and Germany would shoulder the burden but their national publics are growing tired of this ‘duty.’ Another issue surrounds the continuation of the ECB’s bond-buying role instead of allowing the EFSF to buy bonds on the secondary market, which Trichet feels particularly aggrieved about. Superseding all of this is the fact that the EFSF is set to expire in 2013, with the European Stability Mechanism to replace it, so agreement on the shape of this longer-term fund is paramount next week.
Coming into this month, the markets were cynical as to progress on EU debt issues. However, with Trichet turning up the heat on EU leaders (indicating borrowing costs would be increased in April with an ECB interest rate hike) we saw greater political commitment last weekend and increased market confidence followed. The euro has strengthened against the US dollar and sterling accordingly, despite several recent peripheral credit downgrades and very high bond yields.
It is possible that agreement on a “comprehensive package” next week will trigger a strong euro rally next week, persuading the markets that the eurozone debt problem can finally be put to rest. More likely though, in this risk adverse environment, is that the markets will greet an agreement positively but remain broadly cautious on the euro. Any gains will be incremental as markets await further proof that the situations in Portugal, Spain and Greece will improve. Sterling is likely to suffer against the single currency if the Summit is successful, at least in the short term, given that the ECB is almost certain to raise interest rates before the BoE. However, the pound should continue to outperform the US dollar, tracking euro strength.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday 17 March 2011
Market Volatility Explained
The beginning of 2011 has thrown up a series of major market-moving events and we thought it’d be useful to take a closer look at the extent to which localised unrest and disasters can send shockwaves through the currency markets, and why. After all, how many of you would expect that the Norwegian Kroner will directly benefit from social uprisings in Bahrain? (Norway is a major oil producer, Middle Eastern tensions push oil prices up, Norway profits.)
Whilst the currency markets are more volatile than, for example the equity markets, in calmer times even currency movements can be relatively predictable. When the market spotlight is focused on economic fundamentals, data announcements have a direct impact and exchange rates are more faithful to trends. In early 2011, we saw sentiment governed by interest rate speculation and sterling benefited accordingly whilst the greenback suffered.
However, such factors are of little relevance to investors during times of uncertainty. Most recently the Japanese crisis, but before this the natural disasters in Australia and New Zealand, and unrest throughout the Middle East and North Africa, place traditional economic factors on the backburner. Long-term investors flee to the safety of currencies such as the Swiss franc, the US dollar and the Japanese yen. Short-term investors, or “speculators,” react so quickly to events that their movement is as unpredictable as the freak occurrences on which they base their currency “bets.”
Using the Swiss franc as an example, market volatility surrounding natural disasters is clearly visible in the context of the Japanese earthquake/tsunami/nuclear crisis, and is clearly visible. The “swissie” climbed 6 cents against the Australian dollar from 1.06 to 1.12 in the space of 3 days, having hovered around the 1.06 mark for the preceding three weeks. Investors abandon calculated risks on currencies such as the aussie, euro and sterling, and revert back to safety in such uncertain times leading to sharp appreciation of “safer” currencies such as the Swiss franc.
We can be confident that these times of heightened volatility will prove temporary. As events stabilise in states such as Bahrain and Japan the market’s will begin to calm down and factors such as interest rate differentials and growth potential will return to focus, bringing with them more predictable currency investments. However, amid soaring debt levels in eurozone peripheral countries, there may yet be another crisis round the corner unless the EU can reach a firm agreement at their Summit meeting next week.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Whilst the currency markets are more volatile than, for example the equity markets, in calmer times even currency movements can be relatively predictable. When the market spotlight is focused on economic fundamentals, data announcements have a direct impact and exchange rates are more faithful to trends. In early 2011, we saw sentiment governed by interest rate speculation and sterling benefited accordingly whilst the greenback suffered.
However, such factors are of little relevance to investors during times of uncertainty. Most recently the Japanese crisis, but before this the natural disasters in Australia and New Zealand, and unrest throughout the Middle East and North Africa, place traditional economic factors on the backburner. Long-term investors flee to the safety of currencies such as the Swiss franc, the US dollar and the Japanese yen. Short-term investors, or “speculators,” react so quickly to events that their movement is as unpredictable as the freak occurrences on which they base their currency “bets.”
Using the Swiss franc as an example, market volatility surrounding natural disasters is clearly visible in the context of the Japanese earthquake/tsunami/nuclear crisis, and is clearly visible. The “swissie” climbed 6 cents against the Australian dollar from 1.06 to 1.12 in the space of 3 days, having hovered around the 1.06 mark for the preceding three weeks. Investors abandon calculated risks on currencies such as the aussie, euro and sterling, and revert back to safety in such uncertain times leading to sharp appreciation of “safer” currencies such as the Swiss franc.
We can be confident that these times of heightened volatility will prove temporary. As events stabilise in states such as Bahrain and Japan the market’s will begin to calm down and factors such as interest rate differentials and growth potential will return to focus, bringing with them more predictable currency investments. However, amid soaring debt levels in eurozone peripheral countries, there may yet be another crisis round the corner unless the EU can reach a firm agreement at their Summit meeting next week.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday 16 March 2011
Eurozone crisis still bubbling under the surface
The crisis in Japan is understandably dominating the headlines in the financial markets as the impact on the global economy is contemplated. Aside from this, the state of emergency in Bahrain is also providing reason for the markets to remain in a heightened state of nervousness. The country’s debt rating has been cut to BBB by Moody's and there remains the possibility of an Iranian militarily intervention if the protests escalate.
Although it’s not dictating market direction at present, bubbling under the surface (and surely soon to come back under the spotlight) remains the eurozone debt crisis.
After last weekend’s EU Summit, the markets responded positively to news that EU leaders agreed to expand the European Financial Stability Fund to €440bn euros, which will now have greater capacity to cope with further euro-area bailouts. But Trichet’s comments this week suggest that the markets may have got overexcited about the weekend’s early progress. Trichet dismissed the agreement as “insufficient” and it’s quite clear that in order to reach the “comprehensive package” there are some serious obstacles to be overcome. It remains to be seen whether the agreement can actually pass through the European Parliament and whether the populations of large eurozone countries, such as Germany and Austria, can be convinced to increase their financial commitments.
Portugal’s credit rating was downgraded by Moody’s yesterday, and the euro suffered accordingly. A Portuguese bailout seems on the cards and a Greek default is certainly probable in the coming months. Any perceptions of a new safe-haven currency in the form of the euro – as was seen in City AM this morning - are wholly misguided; the downside risks to the euro in coming months clearly outweigh its upside potential.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Although it’s not dictating market direction at present, bubbling under the surface (and surely soon to come back under the spotlight) remains the eurozone debt crisis.
After last weekend’s EU Summit, the markets responded positively to news that EU leaders agreed to expand the European Financial Stability Fund to €440bn euros, which will now have greater capacity to cope with further euro-area bailouts. But Trichet’s comments this week suggest that the markets may have got overexcited about the weekend’s early progress. Trichet dismissed the agreement as “insufficient” and it’s quite clear that in order to reach the “comprehensive package” there are some serious obstacles to be overcome. It remains to be seen whether the agreement can actually pass through the European Parliament and whether the populations of large eurozone countries, such as Germany and Austria, can be convinced to increase their financial commitments.
Portugal’s credit rating was downgraded by Moody’s yesterday, and the euro suffered accordingly. A Portuguese bailout seems on the cards and a Greek default is certainly probable in the coming months. Any perceptions of a new safe-haven currency in the form of the euro – as was seen in City AM this morning - are wholly misguided; the downside risks to the euro in coming months clearly outweigh its upside potential.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday 15 March 2011
And its the Swiss Franc coming up on the outside...
Whilst Japan continues to dominate the headlines we have seen the yen and dollar strengthen as the markets chase the solace of safe-haven currencies. However, there is one very well-performing currency that may have crept under your radar- the Swiss franc, A.K.A the Swissie. Due to Switzerland’s economic, political and fiscal stability, the franc represents the third major safe-haven currency. Indeed the swissie has today climbed to its highest point against the US dollar in at least 40 years and is rallying against all its major counterparts, which illustrates its increasing popularity in these times of extreme market uncertainty.
However, just as the Japanese government is determined not to let the yen appreciate too strongly, the Swiss National Bank (SNB) has showed willingness to intervene. The bank intervened last year when it considered the swissie to be overvalued, and it could do the same again if the soaring currency threatens the country’s economic growth, having stated last December that it would “take measures necessary to ensure price stability.”
The Swiss government are concerned about maintaining the strength of its export sector, but a closer look reveals that despite currency appreciation, its trade surplus actually widened last month. In addition, last year’s intervention was broadly unsuccessful (as intervening often is) and cost the SNB $25bn. In light of this, and amid a healthy economy, it seems unlikely that the SNB will act any time soon, though one has to wonder how far they will allow their currency to appreciate. This will surely come to the point if Swiss growth were to slow down and safe-haven appeal remain strong.
Against sterling, the swiss franc has gained 5% over the last month with the rate currently at 1.47. But there is certainly room for further gains with the rate still some way from the 1.44 levels seen at the end of 2010.
In other news, investors looking for higher yields might, ironically, look to Quantitative Easing, racing at Cheltenham Festival on Thursday, people say he has a licence to print money...
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
However, just as the Japanese government is determined not to let the yen appreciate too strongly, the Swiss National Bank (SNB) has showed willingness to intervene. The bank intervened last year when it considered the swissie to be overvalued, and it could do the same again if the soaring currency threatens the country’s economic growth, having stated last December that it would “take measures necessary to ensure price stability.”
The Swiss government are concerned about maintaining the strength of its export sector, but a closer look reveals that despite currency appreciation, its trade surplus actually widened last month. In addition, last year’s intervention was broadly unsuccessful (as intervening often is) and cost the SNB $25bn. In light of this, and amid a healthy economy, it seems unlikely that the SNB will act any time soon, though one has to wonder how far they will allow their currency to appreciate. This will surely come to the point if Swiss growth were to slow down and safe-haven appeal remain strong.
Against sterling, the swiss franc has gained 5% over the last month with the rate currently at 1.47. But there is certainly room for further gains with the rate still some way from the 1.44 levels seen at the end of 2010.
In other news, investors looking for higher yields might, ironically, look to Quantitative Easing, racing at Cheltenham Festival on Thursday, people say he has a licence to print money...
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday 14 March 2011
Japan announces a major round of quantitative easing: how will the yen fare in response?
Reacting to the devastating impact of the earthquake that struck on Friday, the Japanese central bank has announced its intention to pump a record ¥15tn into the economy ($183bn). This follows the reaction of the Reserve Bank of New Zealand to the earthquake that struck Christchurch, which opted to cut rates by 0.50%. With Japanese interest rates currently at next to nothing (<0.10%), the Bank of Japan clearly can’t follow suit, and has therefore opted to loosen monetary policy through flooding the money markets and buying government bonds.
The two countries’ approaches are alternative ways of achieving the same basic goals - to give consumers ‘a break’ in amid social upheaval and to provide support to fragile economic growth.
The so-called policy of quantitative easing that Japan has announced this morning invariably has the effect of weakening the economy’s national currency. The US Federal Reserve’s ‘QE II’ program has been responsible for the dollar’s woeful underperformance over the past year or so. Money-printing increases supply, thus weakening the currency as demand eases.
Accordingly, the yen declined against 13 of its 16 major counterparts as markets reacted to the news. However, just as the New Zealand Dollar did in the immediate aftermath of its rate cut last week, the yen has rebounded relatively strongly. There is a sense that New Zealand’s economy may eventually benefit from Christchurch’s disaster, with its construction sector in particular expected to enjoy strong growth. The same was thought of the Japanese construction sector but the apparent devastation suffered in the country’s north-eastern region seems set to provide a genuine setback to the Japanese economy in 2011. The country has suffered major damage to its infrastructure- most notably its roads and highways, factories and nuclear plants.
Fundamentally, we can be pretty confident of one thing- the yen will not strengthen this year. The Japanese government has this morning said as much. It threatened intervention to curb any sudden yen appreciation, asserting that it “will take decisive steps if necessary” (indeed the BOJ acted on their threat in September last year, though the impact was fleeting). So anyone hoping for a yen appreciation to mirror the aftermath of Japan’s last major earthquake in 1995 will be disappointed.
Behind the government statement is the concern that Japan is an export-dependent country which relies on weaker exchange rates particularly in times of low-growth. When a government makes this sort of statement, market appetite for the related currency is understandably dampened.
Will the yen decline? Well, the scale of the disaster is continually being revised up, and in light of this morning’s government statement, the yen could be set to weaken despite a thus far robust post-quake performance. In addition, we see risk appetite increasing over the course of 2011 and anticipate that funds held in yen will be redirected to higher-yielding, riskier currencies.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The two countries’ approaches are alternative ways of achieving the same basic goals - to give consumers ‘a break’ in amid social upheaval and to provide support to fragile economic growth.
The so-called policy of quantitative easing that Japan has announced this morning invariably has the effect of weakening the economy’s national currency. The US Federal Reserve’s ‘QE II’ program has been responsible for the dollar’s woeful underperformance over the past year or so. Money-printing increases supply, thus weakening the currency as demand eases.
Accordingly, the yen declined against 13 of its 16 major counterparts as markets reacted to the news. However, just as the New Zealand Dollar did in the immediate aftermath of its rate cut last week, the yen has rebounded relatively strongly. There is a sense that New Zealand’s economy may eventually benefit from Christchurch’s disaster, with its construction sector in particular expected to enjoy strong growth. The same was thought of the Japanese construction sector but the apparent devastation suffered in the country’s north-eastern region seems set to provide a genuine setback to the Japanese economy in 2011. The country has suffered major damage to its infrastructure- most notably its roads and highways, factories and nuclear plants.
Fundamentally, we can be pretty confident of one thing- the yen will not strengthen this year. The Japanese government has this morning said as much. It threatened intervention to curb any sudden yen appreciation, asserting that it “will take decisive steps if necessary” (indeed the BOJ acted on their threat in September last year, though the impact was fleeting). So anyone hoping for a yen appreciation to mirror the aftermath of Japan’s last major earthquake in 1995 will be disappointed.
Behind the government statement is the concern that Japan is an export-dependent country which relies on weaker exchange rates particularly in times of low-growth. When a government makes this sort of statement, market appetite for the related currency is understandably dampened.
Will the yen decline? Well, the scale of the disaster is continually being revised up, and in light of this morning’s government statement, the yen could be set to weaken despite a thus far robust post-quake performance. In addition, we see risk appetite increasing over the course of 2011 and anticipate that funds held in yen will be redirected to higher-yielding, riskier currencies.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Friday 11 March 2011
Tsunami hits Japan- how have the currency markets responded?
Japan has suffered from one its most powerful earthquakes for a century, unleashing a devastating tsunami across its northern coast. Today’s events follow last month’s earthquake in New Zealand, and January’s flooding in Australia. Japan represents the world’s third largest economy and the effects of this disaster are being felt throughout the global financial world.
The immediate response to the quake saw the Japanese yen fall across the board. This is understandable; it comes only two days after Japan announced that its economy slipped back into contraction last quarter. However, the market’s slightly longer-term response to the quake is somewhat counter-intuitive.
Since its initial dip, the yen has rebounded very strongly against all its counterparts as the markets. Why? The yen is one of the world’s few safe-haven currencies, which investors turn to in times of uncertainty. The earthquake may have occurred in Japan, but the global financial markets are intertwined and the widespread concern that has been triggered has seen the yen appreciate impressively. Market appetite for safety had already been heightened this week amid soaring oil prices, turmoil in the Middle East and North Africa, and eurozone debt concerns – this earthquake merely confirms this recent investor mindset. Accordingly, other safe-haven currencies such as the US dollar and the Swiss Franc have today strengthened against riskier assets such as the euro and sterling.
So will the yen continue to benefit from the earthquake? This will not be clear until the extent of the damage to the Japanese economy is ascertained. If Japan’s last major earthquake in 1995 is anything to go by, then the yen will continue to appreciate impressively. But the yen has heavily underperformed this year and with Japanese interest rates low and growth prospects poor, it will take prolonged risk aversion for this downwards trend to be reversed.
In other Caxton FX-related news, it was excellent to see fellow analyst Duncan Higgins quoted by Reuters today on his UK rate rise forecast.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The immediate response to the quake saw the Japanese yen fall across the board. This is understandable; it comes only two days after Japan announced that its economy slipped back into contraction last quarter. However, the market’s slightly longer-term response to the quake is somewhat counter-intuitive.
Since its initial dip, the yen has rebounded very strongly against all its counterparts as the markets. Why? The yen is one of the world’s few safe-haven currencies, which investors turn to in times of uncertainty. The earthquake may have occurred in Japan, but the global financial markets are intertwined and the widespread concern that has been triggered has seen the yen appreciate impressively. Market appetite for safety had already been heightened this week amid soaring oil prices, turmoil in the Middle East and North Africa, and eurozone debt concerns – this earthquake merely confirms this recent investor mindset. Accordingly, other safe-haven currencies such as the US dollar and the Swiss Franc have today strengthened against riskier assets such as the euro and sterling.
So will the yen continue to benefit from the earthquake? This will not be clear until the extent of the damage to the Japanese economy is ascertained. If Japan’s last major earthquake in 1995 is anything to go by, then the yen will continue to appreciate impressively. But the yen has heavily underperformed this year and with Japanese interest rates low and growth prospects poor, it will take prolonged risk aversion for this downwards trend to be reversed.
In other Caxton FX-related news, it was excellent to see fellow analyst Duncan Higgins quoted by Reuters today on his UK rate rise forecast.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday 10 March 2011
UK interest rates left unchanged - expect a rise in June
It is no secret that central bank interest rates represent the main driver of the foreign exchange market at present. So why isn’t today’s monthly UK interest rate announcement an exciting one? Well, because we knew that the 0.5% rate would be maintained, as it has been every month for the past two years.
UK inflationary pressures are soaring at double the BoE’s target and given the ECB’s recent hawkish indication of an April rate hike, there has been growing demand for the MPC to take similar action to tighten policy. However, the BoE is wary of destabilising the economic recovery at this stage and we don’t see rates changing until June. Nor should they; we really need to wait until June to know what impact the UK’s austerity measures will have on British growth.
However, it will be interesting to see what the minutes of the MPC reveal. At last month’s MPC meeting, resident hawks Andrew Sentance and Martin Weale recruited Spencer Dale to their cause, but remained outnumbered by 6:3. We may see a fourth vote added in favour of a rate rise this month, but we still don’t envisage the BoE raising rates before June - by which time there should be firmer evidence that economic conditions are improving.
Given that the MPC was expected to maintain rates, we have seen a somewhat surprising drop in value for sterling, falling by over a cent against the dollar to its lowest point in almost a fortnight. However, the focus for the market will now turn on the EU summit this weekend, where officials will attempt to work towards an agreement on the eurozone’s fiscal troubles. After a week where the euro has suffered somewhat against its major counterparts on the back of flare-ups in Greece, Portugal and now Spain, the single currency would benefit hugely from some progress on the peripheral debt issue.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
UK inflationary pressures are soaring at double the BoE’s target and given the ECB’s recent hawkish indication of an April rate hike, there has been growing demand for the MPC to take similar action to tighten policy. However, the BoE is wary of destabilising the economic recovery at this stage and we don’t see rates changing until June. Nor should they; we really need to wait until June to know what impact the UK’s austerity measures will have on British growth.
However, it will be interesting to see what the minutes of the MPC reveal. At last month’s MPC meeting, resident hawks Andrew Sentance and Martin Weale recruited Spencer Dale to their cause, but remained outnumbered by 6:3. We may see a fourth vote added in favour of a rate rise this month, but we still don’t envisage the BoE raising rates before June - by which time there should be firmer evidence that economic conditions are improving.
Given that the MPC was expected to maintain rates, we have seen a somewhat surprising drop in value for sterling, falling by over a cent against the dollar to its lowest point in almost a fortnight. However, the focus for the market will now turn on the EU summit this weekend, where officials will attempt to work towards an agreement on the eurozone’s fiscal troubles. After a week where the euro has suffered somewhat against its major counterparts on the back of flare-ups in Greece, Portugal and now Spain, the single currency would benefit hugely from some progress on the peripheral debt issue.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday 9 March 2011
The Tobin Tax: Will they, Won’t they?
Yesterday, the European Parliament (EP) voted to pass the Tobin Tax, otherwise known as the Robin Hood Tax. The tax proposal represents a 0.05% levy on all financial transaction passing through the EU and it is estimated that it will raise €200bn annually. Whilst the EP may have backed the proposals, the measure will not come into force until it is passed by national legislatures. Herein lies the main obstacle...
Is it a good idea? Well in theory it’s certainly a nice idea. Banks would barely notice the impact of the levy and it would reduce exchange rate volatility caused by short-termism, but the fund could also be used to ease global poverty and the effects of climate change.
However, although the tax is appealing the pitfalls are glaring. The tax is likely to have the damaging effect of reducing liquidity in the FX markets as speculative investors would turn elsewhere. The EU wants to press ahead with EU-wide coordination of the levy if a worldwide tax proves too difficult to attain (as surely it will). However, in light of this the tax would simply be unenforceable as EU financial centres would be a far less attractive place for banks to do business. Inevitably major institutions would relocate en-masse to more tax-friendly centres, taking with them a vital source of income for the EU.
Nonetheless, France and Germany are right behind the tax, and accuse the UK of “dragging its feet” on the issue. London is the global financial centre of the world and Britain’s economy is heavily reliant on the financial services industry. Banks relocating is a heated enough debate as it is so can we blame George Osborne & Co for balking at the prospect of adding yet another tax?
It seems highly likely that, despite the renewed energy the EU is putting behind it, the Tobin Tax will not gain the widespread approval that such a measure requires. Whilst so-called “banker bashing” is an excellent way for political leaders to bolster their own popularity, the Tobin Tax reeks of over-ambition and impracticality. And as for “banker bashing,” don’t be fooled by the label of “Robin Hood Tax,” the burden that the tax will impose on the banks will, as ever, simply be passed on to the consumer, so be careful what you wish for…
Richard Driver
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday 8 March 2011
Will the eurozone debt crisis flare up once more via Portugal? And what will it mean for the euro?
Eurozone leaders are meeting this weekend in a prelude to the main EU summit in a fortnight’s time, where they will attempt to work towards an expanded bailout fund to deal with the region’s debt problems. As ever, the market expects little progress.
Addressing the key issue, it’s less a question of whether Portugal will need to accept a bailout and more of a question of when. The likelihood is that this will be sooner rather than later as the longer Portugal delays the inevitable, the more expensive it will become. The ailing country’s 10-year bond yields reached euro-era highs yesterday at 7.55%, which is simply not sustainable. Portugal opposes turning to the EU and IMF for help, but similar bond yield trends triggered bailouts for Greece and Ireland last year, and if Portugal sticks to its stubborn line then monetary assistance may be forced upon it by April.
As if things weren’t bad enough for poor old Portugal, Trichet has recently indicated that the ECB will raise interest rates to fight inflation (as discussed in the last blog), which will only increase borrowing costs for a country that remains in recession. So, what choice does Portugal have?
Interestingly, the market has moved the spotlight back onto Greece this week, in light of Greece’s recent credit downgrade. However, the markets are fickle and the Portuguese problem will be back in the headlines before long.
The impact that a Portuguese bailout or a Greek default will have on the euro is not as clear as might be imagined. A trend appears to have emerged of fading market sensitivity to eurozone debt crises over the past year; Greece shocked investors, Ireland less so, and more recently the euro has strengthened across the board despite these imminent periphery issues. On the other hand, investors may lose patience with the eurozone’s inability to find a long-term solution. Clearly a firm agreement on the bailout fund at the end of this month would do much to set investors minds at ease.
For the time being, the single currency seems set to continue to benefit from its new “front-of-the-queue” status with regard to raising interest rates. However, once this arrives (consensus is that this will be in April), focus will then shift to the effect that this rate rise could have on countries like Portugal, and their impending funding issues. Accordingly, a long-term euro uptrend is far less secure than its monthly outlook and sterling could yet revisit the winning ways it enjoyed early this year, especially following its own rate hike (potentially May/June), which is bound to entice investors.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Addressing the key issue, it’s less a question of whether Portugal will need to accept a bailout and more of a question of when. The likelihood is that this will be sooner rather than later as the longer Portugal delays the inevitable, the more expensive it will become. The ailing country’s 10-year bond yields reached euro-era highs yesterday at 7.55%, which is simply not sustainable. Portugal opposes turning to the EU and IMF for help, but similar bond yield trends triggered bailouts for Greece and Ireland last year, and if Portugal sticks to its stubborn line then monetary assistance may be forced upon it by April.
As if things weren’t bad enough for poor old Portugal, Trichet has recently indicated that the ECB will raise interest rates to fight inflation (as discussed in the last blog), which will only increase borrowing costs for a country that remains in recession. So, what choice does Portugal have?
Interestingly, the market has moved the spotlight back onto Greece this week, in light of Greece’s recent credit downgrade. However, the markets are fickle and the Portuguese problem will be back in the headlines before long.
The impact that a Portuguese bailout or a Greek default will have on the euro is not as clear as might be imagined. A trend appears to have emerged of fading market sensitivity to eurozone debt crises over the past year; Greece shocked investors, Ireland less so, and more recently the euro has strengthened across the board despite these imminent periphery issues. On the other hand, investors may lose patience with the eurozone’s inability to find a long-term solution. Clearly a firm agreement on the bailout fund at the end of this month would do much to set investors minds at ease.
For the time being, the single currency seems set to continue to benefit from its new “front-of-the-queue” status with regard to raising interest rates. However, once this arrives (consensus is that this will be in April), focus will then shift to the effect that this rate rise could have on countries like Portugal, and their impending funding issues. Accordingly, a long-term euro uptrend is far less secure than its monthly outlook and sterling could yet revisit the winning ways it enjoyed early this year, especially following its own rate hike (potentially May/June), which is bound to entice investors.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday 7 March 2011
Inflation response: ECB vs MPC
With the eurozone’s headline inflation running at 2.4% (y/y), the surprisingly hawkish comments from ECB President Trichet shocked the market by indicating that the ECB is likely to raise interest rates by 0.25% (from 1%) in April. UK inflation sits at 4.0% and will in all likelihood have increased beyond this point when the latest figure is released next week. However, in contrast to the ECB the BoE remains reluctant to raise interest rates, with the market pricing in a move by May at the very earliest. Both central banks have an inflation target of 2.0%, so what can explain this divergent approach?
Well, as the 0.6% GDP contraction in the final quarter of 2010 showed, the UK’s recovery is by no means guaranteed, with the dangers of stagflation and a double dip recession never far from focus. UK unemployment remains very high (nearly 8%) and the effects of the UK government’s austerity measures are yet to be truly felt by already tight household budgets. An interest rate hike is only likely to exacerbate these issues and the dovish majority within the MPC take the view that temporary factors are responsible for high UK inflation (such as VAT, oil prices and past sterling weakness). These factors are expected to fade over the longer to leave inflation on target. In truth, the UK’s recovery is on somewhat shakier ground than the eurozone’s (when taken as a whole) but the BoE risks losing credibility on tackling inflation.
The ECB’s more hawkish response is due to a stricter commitment to price stability, rather than the MPC’s approach of balancing this remit with stimulating economic growth. This can perhaps be put down to a more optimistic outlook from the ECB on eurozone and indeed global economic growth.
However, whether or not the ECB’s impending rate rise is prudent, remains to be seen. The move is not without its serious risks to ongoing eurozone periphery debt levels and bond yields - unemployment rates and budget deficits in states like Greece and Portugal vastly overshadow the UK’s. Much faith is being placed on German economic growth to drag the periphery out of recession but the rate rise could yet prove to be self-harming for the eurozone.
And finally, what implications does the ECB’s April rate rise have on the likelihood of a similarly early move from the BoE? That the ECB is convinced of the need to tighten monetary policy may persuade some of the more dovish MPC members to join Sentance’s growing hawkish faction (currently out-numbered by 6:3). However, the eurozone is the UK’s biggest export partner, and if an ECB rate hike slows demand for UK products then this could take much of the heat out of the British economy, which in itself could ease inflationary pressures
Fundamentally, the deciding factor for the MPC is likely to be the UK’s GDP performance in the first quarter of 2011 and if it does bounce back strongly, the MPC will find it difficult to resist tightening policy.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Well, as the 0.6% GDP contraction in the final quarter of 2010 showed, the UK’s recovery is by no means guaranteed, with the dangers of stagflation and a double dip recession never far from focus. UK unemployment remains very high (nearly 8%) and the effects of the UK government’s austerity measures are yet to be truly felt by already tight household budgets. An interest rate hike is only likely to exacerbate these issues and the dovish majority within the MPC take the view that temporary factors are responsible for high UK inflation (such as VAT, oil prices and past sterling weakness). These factors are expected to fade over the longer to leave inflation on target. In truth, the UK’s recovery is on somewhat shakier ground than the eurozone’s (when taken as a whole) but the BoE risks losing credibility on tackling inflation.
The ECB’s more hawkish response is due to a stricter commitment to price stability, rather than the MPC’s approach of balancing this remit with stimulating economic growth. This can perhaps be put down to a more optimistic outlook from the ECB on eurozone and indeed global economic growth.
However, whether or not the ECB’s impending rate rise is prudent, remains to be seen. The move is not without its serious risks to ongoing eurozone periphery debt levels and bond yields - unemployment rates and budget deficits in states like Greece and Portugal vastly overshadow the UK’s. Much faith is being placed on German economic growth to drag the periphery out of recession but the rate rise could yet prove to be self-harming for the eurozone.
And finally, what implications does the ECB’s April rate rise have on the likelihood of a similarly early move from the BoE? That the ECB is convinced of the need to tighten monetary policy may persuade some of the more dovish MPC members to join Sentance’s growing hawkish faction (currently out-numbered by 6:3). However, the eurozone is the UK’s biggest export partner, and if an ECB rate hike slows demand for UK products then this could take much of the heat out of the British economy, which in itself could ease inflationary pressures
Fundamentally, the deciding factor for the MPC is likely to be the UK’s GDP performance in the first quarter of 2011 and if it does bounce back strongly, the MPC will find it difficult to resist tightening policy.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Friday 4 March 2011
Sterling heading lower following ECB fireworks
So, a comparatively quiet non-farm payroll Friday draws a hectic week to a close, lending us the opportunity to take stock of a major shift in market sentiment and to look ahead to next week’s activity. Thursday’s disappointing UK services sector figures were overshadowed by events in Europe. In response to eurozone inflationary pressures, ECB President Trichet’s groundbreaking remarks on the likelihood of a rate hike within the next month placed the euro firmly on the front foot against all its counterparts.
With the ECB now well ahead of the BoE in terms of rate hike expectations, sterling looks set to weaken to levels potentially as low as 1.1360 against the euro in the coming weeks and months, though it should remain stable against a broadly weaker US dollar. With the single currency reaching a one-month high against sterling today, investors have clearly (and understandably) responded very positively to Trichet’s hawkish tones. However, perhaps greater caution would be sensible as a rate hike could yet prove highly damaging for the eurozone’s periphery members, where bond yields and unemployment remain harmfully high and growth remains elusive. The prospect for higher rates offers investors a greater return and has lifted euro demand, but, if they cause deepening debt crises in the PIIGS, the prospects for the European economic recovery, and therefore the euro, will suffer considerably.
Taking a longer term view, the market at this stage is only pricing in a single rate hike from the ECB this year (April) in order to bring eurozone inflation back to target (2.0%), however, markets are pricing in up to three UK rate rises this year, which could give sterling the edge in later months.
After this week’s excitement, we are likely to see something of a lull next week with few major data releases or announcements due. Following the heightened volatility that has epitomised the past few sessions, it will be interesting to see whether a broader trend of euro strength is consolidated. The market’s sole focus will on Thursday’s Bank of England rate statement, where investors will watch for any clues of an unlikely replication of the ECB’s hawkish response to inflation. Whilst UK inflation is at a far more alarming level than that of the eurozone (4.0% vs 2.4%), the majority of the MPC voters seem determined to maintain their ‘wait-and-see’ approach with regard to the effects of austerity measures on the UK’s stubbornly fragile recovery. No change to the 0.5% UK interest rate is therefore widely expected. That said, no one was seriously entertaining the idea that a rate rise from the ECB would be brought forward by five months this week!
In the US, today’s Non-Farm employment results for February met positive expectations and further evidenced the promising signs of economic recovery that we’re seeing on the other side of the Atlantic. Nonetheless, a radical improvement, which remains highly unlikely, will be necessary before the Federal Reserve decides to change course from its strong commitment to keep rates at record lows. It is this factor which limits sterling’s downside risks against the dollar and provides hope of a long-term continuation of this year’s gradual GBP/USD strengthening.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
With the ECB now well ahead of the BoE in terms of rate hike expectations, sterling looks set to weaken to levels potentially as low as 1.1360 against the euro in the coming weeks and months, though it should remain stable against a broadly weaker US dollar. With the single currency reaching a one-month high against sterling today, investors have clearly (and understandably) responded very positively to Trichet’s hawkish tones. However, perhaps greater caution would be sensible as a rate hike could yet prove highly damaging for the eurozone’s periphery members, where bond yields and unemployment remain harmfully high and growth remains elusive. The prospect for higher rates offers investors a greater return and has lifted euro demand, but, if they cause deepening debt crises in the PIIGS, the prospects for the European economic recovery, and therefore the euro, will suffer considerably.
Taking a longer term view, the market at this stage is only pricing in a single rate hike from the ECB this year (April) in order to bring eurozone inflation back to target (2.0%), however, markets are pricing in up to three UK rate rises this year, which could give sterling the edge in later months.
After this week’s excitement, we are likely to see something of a lull next week with few major data releases or announcements due. Following the heightened volatility that has epitomised the past few sessions, it will be interesting to see whether a broader trend of euro strength is consolidated. The market’s sole focus will on Thursday’s Bank of England rate statement, where investors will watch for any clues of an unlikely replication of the ECB’s hawkish response to inflation. Whilst UK inflation is at a far more alarming level than that of the eurozone (4.0% vs 2.4%), the majority of the MPC voters seem determined to maintain their ‘wait-and-see’ approach with regard to the effects of austerity measures on the UK’s stubbornly fragile recovery. No change to the 0.5% UK interest rate is therefore widely expected. That said, no one was seriously entertaining the idea that a rate rise from the ECB would be brought forward by five months this week!
In the US, today’s Non-Farm employment results for February met positive expectations and further evidenced the promising signs of economic recovery that we’re seeing on the other side of the Atlantic. Nonetheless, a radical improvement, which remains highly unlikely, will be necessary before the Federal Reserve decides to change course from its strong commitment to keep rates at record lows. It is this factor which limits sterling’s downside risks against the dollar and provides hope of a long-term continuation of this year’s gradual GBP/USD strengthening.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday 3 March 2011
Trichet slams inflation, bolstering euro
“An increase of interest rates in the next meeting is possible.” So spoke Jean-Claude Trichet at the ECB’s press conference earlier today. This, and similarly hawkish comments throughout the conference, have brought forward market expectations for an ECB rate rise by five months! The market now expects to see the ECB move the base rate from 1.00% to 1.25% at their meeting in on April 7th.
As detailed in my previous blog-post there were rumours that Trichet would be overtly hawkish in calling for the inflationary pressures to be quashed. He did not disappoint. Indeed he went above and beyond expectations stating that “strong vigilance” is required.
The upshot of all this? The euro has had a storming day! Against all 16 of its major counterparts the single currency has climbed, hitting a fresh four month high versus the US dollar at $1.3974, breaking strong resistance at $1.3950. It has also put the sterling price back to 1.1650.
The reasoning behind this sharpened rhetoric from Trichet comes from higher inflation, stemming from rocketing oil prices (and other commodities), which have pushed inflation levels above the ECB’s 2% target.
Adding to sterling’s woes, the pound stumbled following a disappointing reading of activity in the UK services sector, undoing the improved sentiment seen earlier in the week off the back of positive manufacturing and construction data.
The services PMI index fell to 52.6, down from an 8-month high of 54.5, underperforming market expectation.
Although the figure doesn’t exactly signal Armageddon (all key industries are still in expansionist territory), weak fundamentals and jitters about the stability of the economy will leave the pound vulnerable to investors paring back their expectations for an interest rate hike.
So what does this all mean going forward? I fear that we have may seen a game changing statement today. Sterling’s prospects against the euro do not look nearly as healthy as they did yesterday. We still feel that further upside against the US dollar is due, though this move will likely be one of dollar weakness. Downside risks for sterling/euro have swung into view…
Ewdard Knox
Analyst - Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday 2 March 2011
Pound punches high with recovery looking promising
The pound’s run of good form against the greenback continued today, with the price being dragged up through $1.63 as comments from the BoE governor Mervyn King yesterday did little to dampen the markets view on interest rate speculation.
Sterling came within a whisker of a 13-month high today as King exhaustedly claimed that “raising interest rates to make a gesture is self-defeating.” This followed a rather more assertive Conservative MP who lambasted the senior MPC members for wildly underestimating inflation.
Charles Bean, the deputy governor of the MPC showed signs of leaning towards the hawkish camp by echoing this sentiment in a written statement to the Treasury select committee, exclaiming his concern that this elevated inflation may well persist longer than he anticipated. This contrasts with comments from Fed Chairman Ben Bernanke who claimed that soaring oil prices pose only a “temporary threat” to inflation, which indicated to the market that the Fed will persist with its ultra-loose, accommodative monetary policy for the foreseeable future. Under this outlook, the pound’s rally could yet go further!
The threat of inflation entrenching itself in the UK do appear very real, and hence we’re seeing the market price in a near-term rate rise. But are the arguments about the fragility of the economy still stacking up?
Recent figures suggest that the UK economy has rebounded strongly in the first quarter of 2011, offsetting Q4s disappointment. Positive data from the construction industry, released earlier today, followed equally upbeat manufacturing data earlier in the week. These two sectors combined account for around 20% of our GDP. If data from the services sector tomorrow completes the picture, the UK economic recovery will certainly look to be gathering some momentum.
As far as “cable” (GBP/USD) goes then, we could well be seeing these dizzying heights sustained, with the next tough resistance level seen at 1.6450. However, against the equally well-performing single currency the story may be slightly different. The market is expecting some hawkish comments on inflationary pressures from ECB president Trichet in the ECB press conference tomorrow. Such comments look set to keep the €1.20 level out of the picture for the time being.
Ewdard Knox
Analyst - Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
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