Carney gasps for air

So it seems that this week Governor Carney has been pushed into a corner. With UK data flying high for the majority of this week and the UK recovery appearing more balanced, it is no surprise that this week the GBPEUR rate finally breached €1.18. Yesterday the BoE kept rates on hold at 0.50% (no surprise there), and didn’t make any accompanying statement. This may have been a wise call considering the market took everything it wanted from Governor Carney’s speech last week. However, “no comment” has repercussions, and yesterday we witnessed this as UK 10yr debt spiked to a two year high, above the 3% mark. Disappointing industrial production data and the awful trade deficit figure has managed to provide a little justification for the BoE’s stance. If next week’s employment data shows improvement in labour figures, then the pressure on Carney may rise again. After all, the market can’t really expect perfect data. Time is ticking on the policy front and although current policy may be warranted, the market still doesn’t seem too convinced.

Sasha Nugent

Currency Analyst

Caxton FX

A great week so far for sterling

This week the UK has produced outstanding PMI figures with manufacturing, construction and Service PMI figures all smashing estimates suggesting that the UK is healthier and more stable than we previously thought. The pound has stuck its tongue out at the euro as the upswing in positive data has been reflected in the GBPEUR rate racing past 1.18, highs not seen since May this year. Even against the US dollar, sterling has showed that it isn’t a pushover, and if the US dollar is to strengthen, the Fed better make up their mind about if and when they will taper stimulus this year. The UK’s top class performance prompted the Confederation of British Industry to increase their UK growth forecast last month. Optimism about the UK outlook has continued this week and yesterday the OECD (Organization for Economic Cooperation and Development) released its growth forecast for the UK raising their estimates to 1.5% yearly growth from an earlier prediction of 0.8%.

The BoE rate announcement on Thursday could pull a dark cloud over recent sterling performance. If Governor Carney talks that dovish talk then we could well see the pound fall back (we may finally be convinced). Nevertheless, what the FX market cannot deny is that the outlook for the UK definitely deserves a thumbs up. Assuming it continues in this direction Carney’s commitment low interest rates may become questionable, and the market will not hesitate to give him a run for his money. After all, we haven’t even begun to rip apart effects to inflation, only then will his true colours have to show and we will see whether Carney can actually walk the walk.

Sasha Nugent

Currency Analyst

Caxton FX

Carney clarifies BoE interest rate outlook

In Mark Carney’s first policy speech, he put to bed worries about the MPC’s willingness to ensure the interest rate remains at 0.5%. The outlook on the UK economy has been looking increasingly positive, resulting in speculation that the unemployment rate will fall to 7% faster than the central bank is predicting and consequently push interest rates higher. In his speech to business leaders today, Carney said if interest rates tighten due to rising expectations “and the recovery seems to be falling short of the strong recovery we growth we need, we will consider carefully whether, and how best, to stimulate the recovery further.” He also reiterated that “Our forward guidance was clear that, although we would not reduce the stimulus until the recovery is secure, we would if necessary provide more”.

BoE Governor Carney’s objective has been achieved. Confidence that the central bank will aim to keep the interest rates low has been restored. Misinterpretation of earlier forward guidance comments gave the perception that the future of interest rates was solely dependent upon the unemployment rate. In his speech today, the Governor also cleared up that confusion and said “We are giving confidence that interest rates won’t go up until jobs, incomes and spending are recovering at a sustainable pace.” He noted that “Guidance provides you with certainty that interest rates will not rise too soon. Exactly how long they will stay low depends on the progress of the economy.” This highlighted that the bank has a potential strategy in place in case rate pressure continues. Using extra stimulus to support growth shows the central bank is not willing to compromise the strength of the recovery, and achieving healthy growth is a huge priority for the central bank as well as price stability.

As for convincing the markets that the committee has a plan in place, the Governor’s speech looks to have done the job. If price pressure unexpectedly gets out of hand however, the MPC may have to rethink their back up move of increasing stimulus.

Sasha Nugent,
Currency Analyst
Caxton FX

Bank of Canada deals the loonie a blow

The Bank of Canada is ahead of almost every other developed nation central bank in terms of when it expects to normalise monetary policy (raise interest rates). The fact that it is even discussing it is your first clue, as conversations within central banks such as the Bank of England, Reserve Bank of Australia, the European Central Bank and the Riskbank are slanted towards rate cuts, not rate hikes. If it’s not rate cuts, then it’s more QE from the likes of the US Federal Reserve and the Bank of Japan, whose base rates are already at rock bottom levels.

Last year’s Bank of Canada rhetoric pointed towards a rate hike this year. However, the slowdown seen in the US at the end of 2012 has contributed to softer growth in its northern neighbour. Canadian growth has consistently surprised the BoC to the downside in the past year, particularly in the second half of 2012. Governor Carney (BoE-bound this summer) & Co yesterday indicated that the Canadian economy will not be up to full capacity until the second half of next year, which is a major delay compared to the previous ‘late 2013’ projection. Combined with subdued inflation and ongoing concerns over household imbalances, this has led the BoC to communicate that a rate hike is by no means imminent. It estimates a rate hike at the end of this year but our bet is that it will come a later than that.

The loonie has taken a hit as a result of the BoC’s change of position. GBP/CAD climbed by more than a cent and a half up to 1.5850, where it currently trades. Meanwhile CAD/USD dipped by a cent to a level just below parity, which represents a two-month low. This is a bit of a knock to the loonie but we do expect the currency to outperform GBP in the coming months, with another move down to 1.55 very much on the cards. 

Richard Driver

Currency Analyst

Caxton FX