Market Drivers for June 26 2014

Pound over 1.7000 as Carney announce new macro prudential measures

US Income data on tap

Nikkei 0.27% Europe 0.05%

Oil $106/bbl

Gold $1311/oz.

Europe and Asia:

AUD Job Vacancies 2.5% vs. 2.8%

GBP UK Financial Stability Report

North America:

USD Unemployment Claims 8:30 AM


Cable bolted through the 1.7000 level in morning London dealing today as Bank of England governor Mark Carney announced a series of macro prudential moves to contain the country housing bubble.

In speaking before Parliament Mr. Carney outline two specific new directives that UK bank will need to follow. First, UK banks will be required to administer an affordability test, determining if mortgage holders would still be able to services their debt if rate increased by 300 basis points above the originating level. Secondly, no more that 15% of all mortgages will be allowed to exceed the 4.5 Loan to Income ratio, limiting the size of risk loans.

Mr. Carney comments while clearly suggesting that the UK central bank will try to dampen speculation in housing market, did not address any orthodox monetary policy issues. Mr. Carney made no mention of any imminent rate hikes and in fact went out of his way to note that interest rate policy was not the optimal tool to control risk in the housing market.

The currency markets however, responded positively to today’s news lifting cable to a high of 1.7036. Part of the move may have simply been a squeeze as nervous shorts covered their positions ahead of the report.

The BoE is clearly walking a fine line as it tries to establish credibility on the issue of controlling the runaway housing prices while at the same time keeping monetary policy accommodative enough to support UK’s nascent economic recovery. A case could even be made that by instituting a series of macro-prudential measures today, UK monetary authorities are providing themselves with greater leeway to delay any rate hikes in the foreseeable future. Nevertheless, the markets view today’s moves are precursor to tightening and may try to push cable toward the recent highs at 1.7060.

In North American trade today the eco calendar carries unemployment claims and personal income and spending data, the later of which may be of some interest to the market. Although US data has shown some improvement over the past several months, in order for the market to become convinced that the Fed will move toward tightening, US wages and spending need to rise. Therefore any upside surprise in the data could help push USD/JPY back towards the 102.00 level as the day progresses.

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