IB FX View

Pound eyes upside after bank upgrade

Thursday July 23, 2009

In yesterday’s FX View we gave some reasons as to why the British pound was coming under selling pressure. As global stock markets rally investors are reaching for higher yield and riskier currency bets, today Britain’s HBOS predicts that as events unfold throughout 2010, the Bank of England will be faster than the Fed as it tightens monetary policy sooner. This will put upward pressure on the pound and has caused the bank to raise its 18-month forecast for the pound to $1.75 leaving other forecasters lagging at $1.67. Today the pound is once again strengthening against the dollar at $1.6523.


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If anything the HBOS analysis is a distraction from the recent Bernanke testimony in which he described the need to an “extended period” of relaxed policy. True, that could run out in 2010 and as we have already seen in this cycle the bond and money markets can easily discount and exaggerate moves without any official confirmation of such action.

The analysis also massively widens the spectrum on what policy makers might do. Within the past three weeks and just ahead of the last Monetary Policy Committee meeting of the Bank of England, London’s Sunday Times speculated that the central bank would extend its asset purchasing program. The subsequent minutes released this week reported that the members agreed unanimously to hold that policy steady. There is a groundswell of speculation about whether the August Quarterly Inflation Report from the Bank will reveal the need for more asset purchases to help lift consumers and companies out of the recession beyond the initial rebound.

Today’s assessment augurs for an imminent abandonment of the asset purchase program and raises the stakes for the pound. Elsewhere, June’s retail sales data rose at 1.2% and outpaced expectations of a 0.3% add. Mortgage approvals also rose to the strongest level since March 2008 adding to the weight of those arguing for a housing market recovery. This data also flies in the face of the NIESR view, which yesterday helped lower the value of the pound. The very notion of a rate rise has the potential to be a currency driver going forward. Expectations are played out through the monetary futures market and help drive the currency forwards curve such that those derived yields are available to long currency positions often well ahead of any mandated interest rate increases. Going forward, today’s prediction is likely to stoke more debate on when any central bank will start to remove that punchbowl.

The Japanese yen suffered once again given the eight-day streak of Asian stock market rises. The Nasdaq has now had 11 consecutive daily rallies. The obvious desire for safety goes right out of the window at this time, which helps explain the dollar’s appreciation to 94.87 today. The euro also knocked the socks off the Japanese unit rallying hard to 135.05.

A slowdown in the pace of contraction of Japanese export data also undermined the yen and is taken as another piece of confirmation that foreign demand for Japanese manufactured goods is alive and well.

The report also spurred an advance in the Australian dollar, which counts Japan as one of its top two export markets – China being the first. The Aussie gained against the yen and rallied to 82.00 versus the U.S. unit. As bond markets start to empathize with stock market movements yields are increasing and spreads are widening with the two-year spread between Australian and U.S. debt stretching out. That accentuates the demand for the Aussie dollar in this pro-growth day.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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