BOE and The Pound
A collective sigh of relief was heard at trading desks overnight, the result of decisive action taken by the Bank of England.
Not one to shy away from a challenge, Bank of England (BoE) Governor Carney spoke frankly about an economic outlook that had “changed markedly”. Moreover, unlike the BoJ, RBA, RBNZ or ECB, the BOE backed up their position of a dim economic outlook by vaulting into actions to exceed the market’s expectations.
While a 25bp cut in the Bank Rate to 0.25% and an increase in QE was widely expected, what was less anticipated was the BOE’s creative measure: a GBP100bn four-year Term Funding Scheme (TFS). This innovative “Bazooka” is designed to mitigate the difficulty local banks have attracting deposits, as interest rates are close to zero. By actually creating a low-cost funding facility for banks, it allows for a more efficient systemic transferal of the BOE monetary policy to filter through the banking system. If other G-10 central bankers were not applauding, they certainly should be.
We have finally had a G10 Central Banker that is willing to jump ahead of the curve, with a solid policy that will propel the domestic currency into the desired direction.
The market now apparently believes that the BOE stands ready to take whatever action is needed.” Given this stance, we should anticipate a retest of the £1.28 level, which should then open the door for a deeper move in the coming months
Australian Dollar –The Search for Yield
Not unexpectedly the AUD and NZD both rallied on the BOE rate cut as the market marches on with an unwavering search for yield mentality in the post-referendum environment.
AS for yesterday’s Retail sales data, if the RBA rate cut barely muster a reaction from Aussie Bears its unlikely slight misses on the headline data points will alter that mentality.
An initial impression of this week’s price action is the market continues to buy the dips, which are becoming increasingly shallow suggesting that buying into Aussie weakness remains the favoured trade.
The Australian Dollar is looking very constructive heading into the RBA Monetary Policy Statement, which should offer few if any surprises.,
Apparently the chase for yield mentality rules.
SOMP The highlights:
- The data coming to hand since May have not altered the outlook for output and unemployment and confirm inflation is likely to remain below 2% over most of the forecast period, RBA says in quarterly Statement on Monetary Policy released Friday.
- RBA notes outlook for Chinese economy remains important source of uncertainty for global growth and demand for commodities, while A$ represents a significant source of uncertainty for forecasts of inflation, as well as the outlook for growth in activity
New Zealand – Rate Cut Debate Rages On
The New Zealand dollar (NZD) is at a critical juncture heading into next week’s RBNZ and debate is reaching fever pitch. The minimum of expectations has RBNZ Governor Wheeler delivering at least a 25bps rate cut, with much of the market debate focussed on the possibility of a 50bps ‘let’s get ahead of the curve’ cut, be it two consecutive 25bps rate cuts or possible FX intervention.
It is more likely that we will see back-to-back cuts in August and September, but nonetheless, we should continue to expect the NZD to trade heavy.
Despite the apparent policy divergence between the RBA and RBNZ, and while the trade is getting crowded, I think the best way to convey the short NZD trade is through the long AUD/NZD position.
Japanese Yen – Temporarily Sidelined
The JPY was sidelined by the Bank of England news overnight and its price action, or lack thereof, spoke volumes about a market that appear driven only by local headlines. I am sure that Governor Kuroda was taking notes overnight about the BOE’s ‘everything but the kitchen sink’ mentality.
Early this morning in APAC trade we are mired in the ¥100.75-101.75 range, with limited conviction and despite the path of least resistance being paved lower.
Overnight, the USD/JPY pair was stonewalled at ¥101. Consequently, tonight’s US Nonfarm Payroll (NFP) is attracting more than usual attention. However, I suspect that only a stellar Jobs Report, with accompanying wage gains, will impart any adjustment on the Fed’s interest rate dial.
At this point there appears small risk reward for any significant positions changes, so traders are back to yen headline hunting, looking for short term flips. Given recent erratic market moves, it may make it increasingly difficult to hold longer term views.
YUAN
The Yuan is moving off its recent lows on the back of position squaring and ahead tonight’s NFP.
The yuan Bears appear to be remaining in hibernation and will likely do so until expectations reignite for a Federal Reserve interest rate hike.
I do not believe that this evening’s NFP will be a game changer, as a print above 220K is unlikely and will fail to move the Fed’s interest in moving rates. An abrupt shift in Fed Policy is unlikely, and the PBOC’s job to maintain a stable currency is proving much easier than anticipated.
THB – Verbal intervention
The Bank of Thailand’s recent comments concerning baht appreciation are not conducive for the economic recovery triggers short covering over the past 24 hours. The 35.00 level was tested but ran into substantial offers with little momentum to take the USD higher , inflows dominate.
MYR – All about Oil
Intra-day market movements remain influenced by oil prices, but the recent slide in these prices is dampening investor enthusiasm.
There is elevated market chatter about a back-to-back rate cut in Malaysia, but I think this card is being overplayed in the context that we see rather timid impacts from other regional central bank rate cuts (e.g. RBA). The real focus should be on rate movements from the US Federal Reserve board, which at this stage, appear sidelined indefinitely.
Clouds are forming but nowhere near storm levels as yet.