Good morning,
Dollar pulling higher as cleanest dirty shirt
USD is back to a trade-weighted 2 month high this morning, as disappointments and policy reversals in other currencies has seen the attraction of the greenback increase.
The most disappointing news is once again from Japan which has seen some rather lofty stimulus expectations peter out overnight following comments from the Japanese Finance Minister. Finance Minister Aso told reporters earlier today that the government will “leave actual policy measures to the Bank of Japan”; a tacit acknowledgement that the one-two punch of monetary and fiscal stimulus that ourselves and many commentators had been looking for, does not exist.
While a stimulus plan is set to be unveiled and decided upon by the Japanese authorities in the coming months there seems to be little room for stimulus focused on private consumption in Japan, regardless of headlines screaming that the overall package will be double the 3 trillion yen that markets had previously expected.
USDJPY initially peaked higher on the news but has since begun to sink back and remains below the 105.00 level. We will need more from the Japanese authorities to bring about a further weaker yen.
Weale changes tack
Friday’s PMI number from the UK that showed the largest fall in output since 2009 has been enough to convince one member of the Bank of England’s Monetary Policy Committee that now is time for immediate stimulus. Martin Weale who only a week ago gave a speech detailing the need to wait for “firmer evidence”.
Speaking to the FT he said “They are the best short-term indicator we have at the moment. I certainly feel they are very material for the decision we’ll be taking next week,” adding that they were “a lot worse than I had thought” and showed “expectations have worsened sharply”.
With Weale now expected to vote for a policy cut in what will be his last meeting as a member of the Monetary Policy Committee it is now almost a guarantee that the majority will plump for a stimulatory increase in monetary accommodation. The exact make-up of that policy still remains in doubt.
What do we expect?
We are maintaining our call for a Bank of England interest rate cut by 25bps and an increase in QE by somewhere between £50bn and £75bn. Within the announcement we are also looking for something similar to the ECB’s TLTRO – Targeted Longer-Term Refinancing Operation – that allows banks to borrow at negative rates i.e. get paid for borrowing. This would be a subsidy to British banks that should insulate the financial system from the unwanted effects of negative deposit rates should the Bank see the need.
This is the kind of financial policy engineering that may allow for a near term pick-up in inflation expectations and, maybe more importantly, a calming of fears around financial stability.
In any case we will find out next Thursday.
The Day Ahead
Today’s data calendar is almost exclusively focused on the US economy with consumer confidence and new home sales the most important indicators heading into tomorrow’s Fed meeting. We are looking for both strong confidence and home sales to marry up with increased spending and jobs numbers seen earlier in the month.
Have a great day.