For the past couple of months or so it has been impossible to predict what kind of market you will face when climbing out of bed, there could be fewer banks around than when your head hit the pillow, the stock markets may have posted a record rally, or a record fall, or a central banker may have made a comment changing the outlook for interest rates, and reshaping the currency markets overnight. Last nights dramatic drop in the GBP/USD rate may not have been solely down to Mervyn King's speech, the CBI also published an extremely weak assessment of manufacturing yesterday, but his comments haven't helped Sterling's cause. Mervyn didn't say anything that we didn't all know, he admitted that 'it now seems likely that the UK economy is entering a recession.' hardly news for anyone who keeps even half an eye on economic matters.
Overnight the Dollar has risen strongly pushing the EUR/USD rate down to an almost 2 year low around 1.28, and pushing Sterling down a massive 8c, from around 1.70 to 1.62, before the rate bounced slightly to sit just under 1.64. With the Dollar also rising against the Euro it can be seen that the fall in Sterling isn't all in response to Mervyn's speech, but the Pound has suffered more than the Euro, dropping the GBP/EUR rate down to around 1.27.
The USD has benefited from a number of factors, such as the expectation that interest rates will be cut more aggressively elsewhere than they will in the US, not a bad assumption as America doesn't have much space to go down with rates already at 1.5%, another is the unwinding of investments by hedge funds who are repatriating their capital back into Dollars in anticipation of investor withdrawals. As usually when volatility hits the markets, risk appetite has declined, and there is now more signs that the slowdown is spreading to the developing world with Argentina's stock market falling 11% on rumours that the private pension system would be nationalised, which it was shortly later. Industrial metals are also lower, as is Oil, with a barrel of oil costing you roughly $66/bbl.
The most important release of today is the BoE minutes, which due to the internationally coordinated nature of the rate cut, is likely to be 9-0, with perhaps Blanchflower calling for an even bigger cut. The minutes will be looked at for the prospects of more big cuts in the coming months, but we can already get some idea from Mervyn's speech yesterday, in which although he tried to put up a, half-hearted, protest he did concede that risks to inflation have 'shifted decisively to the downside.'
Michael Corcoran| Treasury Solutions | nabCapital