Mervyn King, the Bank of England Governor, all but signed off on a rate cut for
February next year. This caused a sell-off in sterling, most noticeably in the GBPUSD
pair which looked over-priced at the 2.10 highs. The main risks for sterling and the
UK economy lie in the fact that inflation continues to rise, but at the same time we are
entering a period of economic downturn. The outlook for growth presented by the
Inflation report was noticeably pessimistic and acknowledged that the recent US
slowdown and global credit crunch would have a dampening effect on UK activity.
However, the report also acknowledged that commodity and food driven inflation will
continue to rise. Indeed, Tuesday’s CPI figure confirmed this (see below). The
problem the MPC face is, in the face of rising price pressure, the committee needs a
good excuse to cut rates, especially given that they are committed to controlling
inflation through the interest rate mechanism. So bizarrely, we had the Governor
claiming stock markets were overvalued and traders should sell. The reason for this;
a fall from the relatively high levels would give the Bank sufficient reason to cut, as
this would imply we were heading into a downturn or recessionary period.
The pound fell across the board with GBPEUR reaching a 4 ½ year low at 1.3940
during the London session on Friday.
The Inflation conundrum
Last week’s Consumer Price Index would have been concerning for the Bank of
England. The headline number showed the biggest rise since June and took the
year-on-year figure to 2.1%. The dilemma the MPC face is that while inflation
continues to rise, activity and growth are clearly slowing significantly, and should
continue to do so in the current economic climate. The riddle, in economics, is known
as stagflation, a period of recessionary conditions with simultaneously high price
This environment is likely to be negative for sterling as policy makers cannot afford
not to cut rates, they must somehow offset the inevitable slowdown that will result
from the credit tightening crunch. However, recent high fuel, commodity and food
prices do not look like abating.
The week ahead
• The main release will be the Bank of England MPC minutes. Prior to last week,
the market was expecting to see an 8-1 split with the majority voting for a cut.
This may change however, but since the Inflation Report (mention above) has
already caused the pricing in of a cut. We therefore do not expect to see
significant moves from the release.
• The Fed minutes will be released on Tuesday night. This may offer a little
breathing space for the dollar. The market is pricing in a 90% chance of another
cut before December, and 75% of analysts are expecting the same. However,
interestingly, recent comment from the fed has hinted that they may be content
with the current levels in the short-term. If this is indeed true, we may see the
dollar inch up a little and the higher yield, higher risk currencies come under
0207 801 9084
Currency Rates Low High Current
GBPEUR 1.3942 1.4266 1.3976
Euro continued to gather momentum last week against higher yield G7 currencies,
mainly sterling and US dollar but slipped against the lower yield CHF and JPY. The
German ZEW index fell to a record low of -32.5 on its October reading which
reinforced thoughts that an economic slowdown may be on the cards. GDP was firm
at 2.6% however the 4th quarter could prove to be key as credit crunch concerns and
banking institution difficulties should be taken into consideration.
GBPUSD “Cable” 2.0350 2.0866 2.0492
Fears continue in the US over consumer spending pressure and possibilities of
Federal Reserve rate cuts. Any reduction of carry trades would provide some support
for the greenback, particularly if emerging markets weaken. Falls in commodity prices
towards the end of the week also helped dollar strengthen as defensive moves into
T-Bills and Gilts began. Speculation continues this week over whether OPEC
countries Qatar and the UAE will drop their dollar peg in favour of a tie to a more
stable currency or a completely free float.
A slight unwinding of the carry trade has seen commodity currencies come under
pressure in the past week.
Low High Current
GBPAUD 2.2790 2.3514 2.31.64
Carry trade pressures were the main driver behind weakening of the AUD over the
past week. With no really important data released last week, commodity currencies
took their cues from their underlying commodities; gold and copper falling sharply last
week. We see further volatility in line with carry trade unwinding.
GBPNZD 2.6616 2.7772 2.7126
Watchers of Kiwi dollar will be mindful of global equity movements this week as any
and every movement downwards we see on the DJIA or FTSE will surely be
mirrored. With no data being published this week, the carry trade will once again
become the main governor of Kiwi movement.
GBPCAD 1.9639 2.0209 2.0138
As with all commodity currencies, CAD has been brought closer to parity over the
past week due to liquidity fears and carry trade worries. Fears of deterioration in
competitiveness abound as manufacturing shipment figures fell by 0.9%.
Retracements in the price of a barrel of oil and concerns over multinational banking
sectors also hurt the loonie.
GBPZAR 13.475 13.925 13.85
Following a fairly hawkish review of the economy earlier last week another rise in
interest rates seems to be on the cards for December by the MPC. Rand was hurt a
smidge by a fall in manufacturing output due to an earlier 3 week strike although this
is not believed to signal any cooling of inflationary pressures.
Please see GBPEUR comments above. EURCYP is pegged in preparation for Euro
entry and so GBPCYP moves proportionally with GBPEUR. [Update: The Cypriot
government has allowed the currency to strengthen very slightly to 0.573 against
EUR, in light of market pressure. The pair is now stable here.]
Produced by Jabu Henson and Jeremy Cook (firstname.lastname@example.org) Please feel
free to contact me at anytime regarding these briefings, if you have any questions or thoughts
on them, or if you are interested in a particular event in the calendar.
Please call us on 0800 001 5055 if you have any questions or would like to discuss the
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The above comments are only our views and should not be construed as advice. You should
act using your own information and judgement. Although information has been obtained from
and is based upon multiple sources the author believes to be reliable, we do not guarantee its
accuracy and it may be incomplete or condensed. All opinions and estimates constitute the
authors own judgement as of the date of the briefing and are subject to change without notice.
Any rates given are interbank and therefore for amounts of £5million and so are not indicative
of rates offered by World First for smaller amounts.
This week’s data
Tuesday 20 November Previous Expected
US 19:00 FOMC minutes from 30-31 October
Germany 07:00 Producer prices, % M/M Oct 0.2 (1.5
Swi 07:15 Trade balance. CHF bn (nsa) Oct 1.7 1.5
Norway 09:00 Mainland GDP, % Q/Q Q3 1.3 (5.8
UK 09:30 Public sector net cash requirement, £bn Oct 9 -8
UK 09:30 BBA and BSA mortgage lending &
Oct … …
UK 11:00 CBI industrial trends survey – total orders Nov -6 -8
E13 10:00 Construction output, % M/M (sa) Sep 0.4 (2.8
Canada 11:00 Consumer price index, %Y/Y Oct 2.5 2.8
Canada 11:00 Bank of Canada core CPI, %Y/Y Oct 2 2
US 13:30 Housing starts, mn units Oct 1.191 1.17
Japan 23:50 Trade Balance Total, bn yen Oct 613.4 …
Japan 23:50 All Industry Activity Index, % M/M Sep 1 -1.5
Wednesday 21 November Previous Expected
UK 09:30 MPC minutes from 7-8 November
Nov 8-1 7-2
Canada 13:30 Retail sales, %M/M Sep 0.7 0.1
Canada 13:30 Retail Sales less autos, %M/M Sep 0.3 0.3
US 13:30 Initial jobless claims, thous (4wk mvg avg) 17-Nov 339 (330) 330
US 15:00 Michigan consumer sentiment, index Nov F 75 75
US 15:00 Leading indicators, % M/M Oct 0.3 -0.3
Thursday 22 November Previous Expected
Germany 07:00 Final GDP,% Q/Q Q3 – F 0.7 (2.5
E13 09:00 Current account, ¤ bn (sa) Sep 3.8 3.4
UK 09:30 Business investment Q3 – P 0.4 (7.8
E13 10:00 Industrial orders, % M/M Sep 0.5 (6.0
Friday 23 November Previous Expected
Germany 07:00 Import prices, % M/M Oct 0.6 (1.3
E13 09:00 “Flash” manufacturing PMI, index Nov 51.5 51.0
E13 09:00 “Flash” manufacturing input prices, index Nov 59.0 …
E13 09:00 “Flash” services PMI, index Nov 55.8 55.2
E13 09:00 “Flash” Composite PMI, index Nov 54.7 54.1
UK 09:30 GDP – second estimate Q3 0.8 (3.3
Norway 09:00 Unemployment rate (AKU), % Sep 2.5 2.4
Bull/Bullish: one who thinks a market, currency or asset will appreciate
Bear/Bearish: one who thinks a market, currency or asset will depreciate
Pip: the fifth significant figure of a currency price: 1.2345
Big figure: the third significant figure of a currency price: 1.2345
Basis point: a 0.01% unit
Tightening (Interest Rates): raising interest rates (loosening is opposite)
Hawkish: comments that suggest interest rate tightening i.e. moving higher
Dovish: comments that suggest interest rate loosening i.e. moving lower
MPC: Monetary Policy Committee, the body that sets UK interest rates
ECB: European Central Bank, the body that sets the Eurozone interest rate
RBA: Reserve Bank of Australia: the central bank of Australia.
Cross-Currency Pair Flow: Where a set of three interlinked rates, e.g. GBPEUR, EURUSD and
GBPUSD, move as any combination of two of these rates must produce the third in order to satisfy a
condition known as No Arbitrage. If there are movements in two markets, then the third must move
deterministically. Also knows as triangulation.
Carry Trade: Simply put, is the borrowing of money in a low interest economy (Japan) and investing it in
a higher yield economy (Australia). This yields a certain profit unless the interest rate differential
narrows, or the exchange rate moves such that it costs more to buy the currency back.
Fair Value- Also called financial fair value: A measure of the theoretical exchange rate using certain
Macroeconomic models (such as eCIP).
Underlying Inflation: A somewhat academic measure of long-term inflation- removing all the’
interesting’ elements like energy and luxury consumption leaving the ‘boring’ elements like utility bills
and food. [Quotes from BoE governor Mervyn King]
Interest Rate Traction: Although there is a group of people who announce an interest rate, it has to feed
through the economy through some very complex and poorly understood channels. Once rate hikes are
having an effect on inflation and long term yields it is said that they are finding traction with the
Unemployment rate: The percentage of people who are able and ‘willing’ to work (ie in the labour
force) who are not employed.
Participation rate: The percentage of the population of working age in the labour force