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August 2016

Sterling slides in rate cut aftermath

Published: Tuesday 09 August 2016

  • Sterling slides in rate cut aftermath
  • Fed plans in traders’ minds

Sterling has started the week on the back foot triggered by the Bank of England’s recently announced stimulus package.  The Pound is still above the lows registered in the post-referendum sell-off, but these multi-year lows could be tested once again. 
After Friday’s US non-farm payroll number, which came in much better than expected – the USD has continued to strengthen. The market is now beginning to believe the Federal Reserve rate hike calls reflected in the FED funds futures, which have gone from a 57% chance of a hike to a 71% chance. This was a classic case of missed price expectations between the markets projections and the Federal Reserve’s stated plans. There are still arguments over why we might not see a rate hike in 2016. Firstly, the forthcoming US general election is months away and, despite the Federal Reserve explicitly saying they operate as an independent entity to the White House, they may try to make that independence even more obvious in this election period to avoid being viewed as being prejudice. The second argument is, with Central Banks around the world aggressively loosening money supply, the Fed may be reluctant to move the other way causing the USD to strengthen too quickly. Nevertheless, Sterling broke the 1.30 level against the USD this morning which was helped by comments from Bank of England voting member Ian McCafferty who said that more easing will likely be required if the economy slows in line with the initial survey signals.
Yesterday was very quiet on the data front. The only data of note was Chinese Consumer Inflation, Producer Price Index and Trade Balance which all surprised to the upside. The People’s Bank of China have dashed any hopes of further monetary easing in the near term, as concerns continued over a possible asset bubble and the Yuan’s continued depreciation.

Data from Europe has been surprisingly more upbeat recently but what is making the headlines is the volatility in the Europe banking sector which has continued with the IMF calling Deutsche Bank the most dangerous bank in the world right now. Banks across Europe are heavily saddled with bad debt and these challenges could prompt further action by the European Central Bank.
The only Central Bank activity scheduled this week is the Reserve Bank of New Zealand which is expected to cut interest rates by 25 basis points. This is in keeping with generally weaker data across the region and as a reaction to a very strong NZD which is damaging their exports. If the RBNZ adopt a neutral stance we could see the NZD rebound as New Zealand’s 2% base rate is still one of the most generous yields out there.
And commiserations to Britain’s women’s rugby team and our male gymnasts but I loved the image of two gymnasts taking a selfie together. That isn’t extraordinary apart from the fact that one is from North Korea and the other is from the South.  I have no idea how you say entente cordiale in Korean but it is perhaps a clear example of how politicians screw things up and form barriers when people can get along just fine.  

Some classic commentator gaffs

  • "The new West Stand casts a giant shadow over the entire pitch, even on a sunny day." Chris Jones
  • "It's now 1-1, an exact reversal of the score on Saturday." Unknown commentator on Radio 5 Live
  • "Mark Hughes at his very best: he loves to feel people right behind him..." Kevin Keegan
  • "If history is going to repeat itself I should think we can expect the same thing again." Terry Venables
  • "I'm not a believer in luck..... but I do believe you need it." Alan Ball
  • "I'm going to make a prediction - it could go either way." Ron Atkinson
  • "What I said to them at half time would be unprintable on the radio." Gerry Francis
  • "If we played like this every week, we wouldn't be so inconsistent." Bryan Robson
  • "And he's got the icepack on his groin there, so it’s possibly not the old shoulder injury." Ray French
  • "I've told the players we need to win so that I can have the cash to buy some new ones." Chris Turner, Peterborough manager
  • "I never comment on referees and I'm not going to break the habit of a lifetime for that prat." Ron Atkinson 


Today's Major Economic Releases 

Market BST Data/Event Previous Expected
GBP 09:30 UK: Manufacturing production m/m -0.5% 0.0%
GBP 09:30 UK: Goods trade balance -9.9b -9.6b
GBP 09:30 UK: Industrial production -0.5% -0.1%
USD 11:00 US: NFIB small business index 94.5 94.5
CAD 13:15 Canada: Housing starts 218k 196k
USD 13:30 US: Prelim non-farm productivity q/q -0.6% 0.5%
USD 13:30 US: Prelim unit labor costs q/q 4.5% 1.8%

FX Research by Denzil Rickerby

Daily Currency Analysis with Joe De Berniere

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