Currencies Direct Reviews -The Market Awaits BoE

8, October 2009

The scheduled monthly get-togethers take place in London, MPC/BoE and in Venice, the ECB. There is a general consensus that following both meetings, interest rates for the respective currencies will remain at their present lowly levels.

Taking the meetings in chronological order. The MPC are expected to say very little, if indeed anything at all, following the rates announcement at 12.00. They have recently only adjusted the level of QE based asset purchases at the meeting closest to the release of the Quarterly Inflation Report (next due in November) and this situation does not look likely to change. The decision to increase the level of stimulus will therefore be deferred until the next meeting even though some discussion will probably take place today. The minutes will tell us more.

I would also not expect to hear anything today related to the much talked about negative interest rates on banks’ reserves held by the Bank of England. All in all, a bit of a non-event which perversely might prove to be Sterling positive on a day of little data release. The ECB meeting will produce a similar outcome on rates ie no change, the difference being that the Central Bank always has a press conference following their monthly meeting and Trichet feels obliged to occupy the crease for at least a good hour. He is expected to reaffirm the growth outlook for the Eurozone, “economic activity is expected to recover at a very gradual pace” but recent data has not been sufficiently soft for any more dovish a sentiment. On the other side of the equation, and as I mentioned yesterday, the ECB do now appear to be taking a closer interest in future inflationary indicators (which are signalling a firming trend) and as such will wary of allowing upward pressures to get a hold. Status quo the obvious result.

Yesterday was significant for its lack of any sort of action, other than gold which hit a record high during the day’s trade. Both currencies and equities remained becalmed although the Yen extended its bullish run on chatter of Euro 18 billion of Eurozone bond redemptions taking place yesterday in conjunction with a generally positive assessment of the Far East growth recovery. Sterling remained subdued, still affected by the apparent official sanctioning of a weaker currency.

All the market moving action happened after Wall Street’s close with Alcoa reporting a surprise quarterly profit and the Australians releasing better than expected employment data.

The employment numbers from Oz were very much stronger than had been mooted with expectations of a 10K fall flattened when a 40K rise in jobs came through. This spurred the exchange traders into pushing the USD/AUD through the 90 cents level and again focused attention on organising the ‘parity parties’.

This could have been viewed a reason for the interest rate rise earlier this week but the market is on a roll and are now betting that we will say a further 25bp rises at the next two monetary meetings. A bit over the top perhaps but definitely a possibility. The Kiwi Finance Minister quickly saw the writing on the wall and expressed his concern over the weak US Dollar, repeating that he is ‘uncomfortable’ with the level of the NZ Dollar and that given the local currencies strength, any recovery would be unlikely to be export led.

Outside of the policy meetings we are due to get speakers only from the US with the Fed widely represented. Lacker speaking on economic education, Tarullo speaking in the wake of the financial crisis and Bernanke giving an update on the Feds balance sheet.

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Compiled by Tom Nadir.

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Posted in The Market Club Tagged: Currencies Direct, Currencies Direct and MarketClub Updates, tom nadir