YB FX Daily Report – 7th August 2009

Before the credit crunch the debate before MPC meetings was whether the BoE would raise or lower rates by 25 basis points, now the debate is whether they will extend the QE program by 25bn. Before yesterday’s meeting the markets was split between expectations of a 25bn increase in the QE measures, or the BoE holding at current levels, with the strong data out this week pointing to a no change position, but the MPC surprised us all announcing a 50bn increase to the amount of gilts they will buy taking the total amount to 175bn, or close to 12% of UK GDP. Although I related the 25bn to 25bp, in fact they are not the same, in the BoE’s own estimation the 25bn increase is actually equivalent to something like 1-1.25% of cuts. It is no surprise therefore to see Sterling drop after the news, after enjoying a strong morning. The Pound has fallen to below 1.6750 against the USD, and has dipped down below the 2 level against the AUD. The Pound may struggle to make much from any further strong economic news over the coming weeks, with the BoE’s views that the economic recovery isn’t as strong as many had believed or hoped.

Shortly after the BoE shocked the market the ECB did there best to send it to sleep, keeping rates on hold and giving little further indication as to what. if any further actions they will take. There was some speculation before the announcement that the ECB would soften their language with inflation falling to -0.6%, but Trichet seemed sanguine over this, saying that it would only be temporary, and that their covered bond purchases will stave off long term deflation. The economic data, such as the measures of money growth cast some doubt on Trichet’s optimism, with loans to the private sector growing extremely slowly. The ECB need a weaker currency to help stimulate growth, and Trichet keeps trying to talk up the Dollar to help this, but with the US and the UK taking actual action, and not just talking, the Euro is losing out on the race to the bottom, and the BoE’s actions yesterday dragged the Pound lower against the Euro, taking it down from a high of 1.1825, to around 1.1650 in this morning’s trading.

We have just the non-farm payrolls for the markets to look forward to before the weekend. Wednesday’s ADP employment report has dampened expectations for this afternoons release as it showed more job losses than many had expected. Yesterday’s US data was also slightly worse than expected, so a large negative figure may spook the markets, which had previously managed to shrug off bad US news, but with the BoE pessimistic views on UK growth a poor non-farm’s payroll figure could send the Dollar higher as some of the more easily spooked investors seek a safe haven for their capital