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August 2016

Sterling drops on BOE monetary stimulus

Published: Friday 05 August 2016

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  • Sterling drops on BOE monetary stimulus
  • US employment report due later today
  • Canadian unemployment may have risen

In case you missed it, the Bank of England cut the UK base rate by 25 basis points yesterday to just 0.25%. That is the lowest on record and marks a very important transition for the BOE from reactive to proactive.  Someone has been slipping something into the tea in Threadneedle Street to get the Monetary Policy committee, which has consistently missed its targets for a decade. Their decision was not just on the base rate; they also added significantly to the QE budget and suggested a further 0.2% cut may come before the year end if needed. However, Governor Mark Carney was at pains to rule out negative interest rates for now. That makes RBS’s warning to its clients look a little hollow but with a huge loss announced this morning, they have other problems to contend with.

Sterling slipped by a cent or so on the BOE news and remains below yesterday’s highs but above recent lows. Traders, investors and analysts are still trying to work out what sparked the BOE’s pre-emptive actions when all they really have to go on as far as post Brexit data does, are Purchasing Managers Indices. If the data arriving over the rest of August is less pessimistic, the Pound has huge scope to recover. I doubt this morning’s Halifax house price index will be enough to start that process though.

We saw the Reserve Bank of Australia’s August statement overnight and it was quite pessimistic. This cited fears over inflation, wage growth and other factors which prompted Tuesday’s rate cut. It would seem there may well be scope for further rate cuts but the GBP-AUD exchange rate slipped on Sterling weakness nonetheless.

Today’s big news is the US employment report. Yesterday’s weekly jobless claims data was a tad worse than forecast but that doesn’t always translate into poor monthly data. The markets are expecting roughly 180,000 fresh jobs to be created in July, so anything below that will be negative for the US economy but the US Dollar is so well supported by safety conscious investors that it is unlikely to weaken unless the non-farm payroll count rose less than 150,000. Clearly the opposite is also true; if more than 200,000 jobs were created, the USD will strengthen.

Somewhat overshadowed by the US employment report, the Canadian unemployment data is released at exactly the same time. However, the mood music is very different. There is a chance Canada’s unemployment rate could have worsened to 6.9% in July after falling to 6.8% in June. If that is true, the Canadian Dollar will weaken this afternoon.

And the Rio Olympic Games get underway with the official opening ceremony tonight. The football has already started but that is true in Scotland as well, so no big deal then.  I really hope this is a success for the people of Brazil. With a recession, political corruption problems, mosquitoes carrying the Zika virus, dire poverty in some areas of Rio, they have a lot to contend with but perhaps the improved transport network and some of the infrastructure changes will actually make a difference for the future. Let’s hope so. Boa sorte Brasil.
 

Joke

 
“Hey Joe, I hear you bought your wife a 5 carat diamond ring for her birthday,” says Mike.
“Yes I did,” says Joe with a smile.
“I thought she wanted one of those Range Rover Evoques,” says Mike.
“Yes she did,” says Joe, “but where in the world would I get a fake Range Rover?”  
 

Today's Major Economic Releases 

 
Market BST Data/Event Previous Expected
CAD 13:30 Canada: Employment change -0.7k 10.2k
CAD 13:30 Canada: Trade balance -3.3b -2.6b
CAD 13:30 Canada: Unemployment rate 6.8% 6.9%
USD 13:30 US: Average hourly earnings m/m 0.1% 0.2%
USD 13:30 US: Non-farm employment change 287k 180k
USD 13:30 US: Unemployment rate 4.9% 4.8%
USD 13:30 US: Trade balance -41.1b -42.1b
CAD 15:00 Canada: Consumer credit m/m 18.6b 15.5b

FX Research by David Johnson

Daily Currency Analysis with Charlie Horsley



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