IB FX View

British pound rallies after MPC dons rose-tinted spectacles

Wednesday September 23, 2009

The British pound continued this week’s claw back from the edge of the precipice having slumped on the view that the banking sector was in further trouble. The minutes from the September 10 Monetary Policy Committee meeting released today saw all nine voting members get back onto the same page and deliver a more ebullient take on the recovering economy. It wouldn’t surprise us to learn that at least some of today’s rally for the pound lifting the currency to $1.6420 was the exit of some of last week’s short positions wondering what it might take to sink a pound now that Bank of England seems slightly more assured of recovery.


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The release of today’s minutes coincides with the conclusion of the Federal Reserve Board’s policy announcement this afternoon. While no change is expected, the example of the British experience acts as a curtain-raiser as growing expectations surrounding recovery prospects filter through and exert more pressure on the dollar.

As political leaders head for a G20 summit in Pittsburgh there appears to be a growing call for international reform that would include an upward realignment of international currencies against the dollar in order to shorten the odds on a relapse in economic fortunes.

Many are expecting subtle changes in the tone of today’s policy statement from the Fed to reflect slightly better confidence that recovery is taking sustained hold and that one day, an easy policy stance can be removed from the system.

In Norway today the central bank discussed that very theme for its domestic economy and odds seem intact now for a 2009 increase. In New Zealand second quarter GDP data shocked with a positive surprise as figures showed a 0.1% expansion as opposed to a 0.2% contraction in the quarter ending in June. That data boosted the fortunes if the New Zealand dollar and the Australian unit to their highest levels versus the U.S. dollar since August 2008. In New York the Aussie has subsequently eased to 87.26 U.S. cents.

The New Zealand government and central bank had earlier argued that currency strength was likely to stifle its export sector and that would knock-out any signs of recovery. Today the Bank of Canada’s deputy governor, David Longworth echoed the words of his governor and finance minister in noting the same worries over the strength of the Canadian dollar, which today stands at 93.34 U.S. cents and so slightly lower on the day. What lesson investors will take away is uncertain.

The New Zealand dollar experience shows that currency strength ultimately didn’t harm the recovery as far back as the second quarter. As the Canadian and Australian units pull back every time such fears arise it makes perfect sense to expect buyers to take full advantage, until those central banks turn Swiss and dump their own currency on the markets. The prospects of that seem pretty slim.

In London, the minutes of the September meeting showed unanimity between the nine committee members. They voted to maintain rates of 0.5% and decided not to expand the £175 billion asset purchase plan. The governor had asked his colleagues to expand the size of the plan at the August meeting. And while he can still justify that request, he decided that it makes sense for all members to stay on the same page and revitalize that request at a later date if necessary.

The Bank has so far purchased £150 billion of assets under the scheme and the plan should have run its course by November. As Prime Minster Brown noted earlier this week the majority of the stimulus is possibly yet to be felt.

The CBI trade group boosted its quarterly forecast for third quarter growth from a 0.3% contraction to a 0.3% expansion and predicted an end to the Bank’s asset purchase program in a sign that it expects recovery to take a grip.

MPC members noted that higher house prices, a strengthening in the equity market were coupled with lower short-term risks to growth that together could create a “virtual upward spiral for the economy.” However, there was some caution served up from previous financial crises as members noted that there had been several false dawns in the past.

The Bank also announced mortgage approvals today, which indicated that activity remained buoyant over the summer months for housing and taken together with a positive balance in the reading of surveyors reporting higher rather than lower house prices, the weight of current evidence supports the view of a recovering economy. Of course this flies in the face of last week’s prediction from the Item Club that the next downwards leg for British housing will commence in the first quarter of 2010.

The dollar is undergoing a mid-morning rally heading into the FOMC statement and has rallied to $1.4757 against the euro and $1.6400 against the British pound. Against the Japanese yen the dollar has rallied to ¥91.43 and the dollar index has recovered from its lowest point in 12 months.


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


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