Good morning,
Time to turnaround
Turnaround Tuesday has become ‘a thing’ in markets in recent years; watch a trend generate and before long a Tuesday will come along and muck it up for you. Yesterday that happened a fair few times; GBP lower, USD higher, JPY weaker, AUD slipping. All of these near-term trends took a hit yesterday and turned around for various reasons.
Sterling battling a fair few demons
GBP was supported by a number of things and that strength was enough to push the pound to a 1 month high against the USD. Initially the July Construction PMI led the pound higher as it performed less badly than markets had expected. It is difficult to say that it performed better than estimates given its fall to a 7 year low and given the long lead time in construction it’s difficult to think this is the low in spending post-Brexit. Job postponements are due to continue and I’m sure will start hitting the sector harder, soon.
The other driver of sterling recovery yesterday was a belief that for all the chatter about the Bank of England’s Super Thursday meeting and the mountain of policy easing that could be launched by the Monetary Policy Committee whether anything will actually happen. Markets are fully pricing in a 25bps cut in interest rates but can the Bank of England legitimately push for additional easing such as further money for quantitative easing, some form of credit relief for corporates or treasury backed loans? And even if they do talk about them within the policy meeting, will a majority plump for a bazooka of stimulus?
A lot of questions for the Bank of England
I have my doubts and so do some buyers of sterling it seems. While data has shown a negative hit to the UK economy since the vote there is an argument for maintaining a level of reserve ammunition for other issues down the line. Also, while we believe the Bank of England is happy to look through higher inflation numbers, we think that the current fall in sterling has been enough to increase CPI to close to 3% over the coming 2 years – why take it higher?
If I had to put money on it I would say that the Bank of England is more likely to give notice of additional plans that could be enacted by them in the event of a fall into recession but actually hold off from doing so on Thursday. This would be broadly GBP supportive in the short term.
Fiscal disappointment or overanxious market?
While we should never judge a fiscal easing measure by the reaction of a currency, it was clear that Japan watchers were disappointed with the raft of spending measures from the Abe government. USDJPY broke below 101 yesterday and doubts over private consumption increases in light of the Japanese government’s spending plans were the driver. We would hope that the Japanese find a way to encourage companies sat on swollen balance sheets that are hitting record levels, to invest in productivity gains to drive the economy onwards.
AUDUSD has continued its post rate cut increase as investors keep demanding yield and local banks decline to pass on lower rates to their customers. Prime Minister Malcolm Turnbull has demanded big banks pass on the full rate cut or investigations as to why they haven’t will be made.
The Day Ahead
All of this came together to drive the dollar weaker on the session and some prices are getting close to interesting levels; EURUSD is very close to where it was pre-Brexit and further dollar weakness could easily renew calls for run at 1.15.
As Monday was a day of manufacturing, today is a global day of services PMIs. Italy’s number is due at 08.45, France at 08.50, Germany at 08.55, and the Eurozone wide measure at 09.00 with the UK number due at 09.30 and the US’s at 15.00.
Have a great day.