Good morning,

Dollar coming to the fore

The dollar strength that we thought to be around the corner has started to manifest itself through the overnight Asian session. Despite a poor retail sales number yesterday that showed a unexpected slip in sales in March, market participants are either moving into fresh USD longs or, maybe most importantly, selling out of recently held bets that the USD would continue to lose value.

Much like the UK inflation numbers released on Tuesday we will be focused on Core CPI – the measure that doesn’t include volatile food and energy prices – and therefore gives us a truer reading of what underlying prices are doing in the US economy. Maintaining a number of 2.3%, above the Fed’s target, would likely bring forth further USD positivity despite the poor consumer fundamentals seen yesterday.

The number is due at 13.30.

No moves from the Old Lady

Before all that we have the small matter of the April Bank of England meeting. Given this is a meeting that has no Quarterly Inflation Report attached to it, the next one coming in May, there is little chance of any policy shift or directional bias to rock the boat.

Views, fears and uncertainties over the outcome and impact of the referendum campaign and the eventual vote on the UK’s membership of the EU will remain front and centre for the Monetary Policy Committee. In structured economic data, it is likely that Q1 was the weakest in growth terms since 2013 with expectations that businesses and consumers may suspend spending and investment decisions through Q2 as the vote closes in.

Interest rates are into their 8th year of sitting at 0.5% with markets pricing in a cut of 8bps in the next 12 months and no increase in rates for 45 months – the beginning of 2020. As we have said this week and before, sterling is still dramatically undervalued on a trade-weighted basis – by as much as 10% – and alongside net positioning which remains extremely bearish and movements in options markets that suggest that protection against sterling downside is a lot more expensive than it was in the lead-in to the Scottish referendum.

Sterling still vulnerable

The old saying goes that “the night is always darkest before the dawn” and while we do not believe that the night has fully darkened for sterling i.e. we have not seen the bottom in sterling quite yet, the prospects of a strong rebound in the pound increases as the days go by.

November is the earliest meeting we could possibly see the first hike by a Bank of England dealing with a UK that remains part of the EU. This is also a near term positive for the pound but only once a referendum result of Remain dawns.

Within the minutes of today’s meeting we would think that comments will be made about increased risks to the downside on growth, continued weak productivity, fears over the level of our current account deficit and, on a positive note, the pass through of the weak pound into inflation baskets.

BOE policy and the minutes are released at noon.

Singapore adopts crisis policy

Overnight Singapore has sent a note of caution through Asian markets with the Monetary Authority of Singapore by easing monetary policy to prevent appreciation of the Singapore dollar. Singapore is one of the most trade sensitive nations in the world and a shift to target concerns over inflation and growth will raise anxieties in Asian and Australasian central banks as well.

The Singapore dollar is down a per cent on the day so far.

Have a great day.

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