Cable Hammered as More QE Possible

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Market Drivers for Feb 20, 2013
Pound hammered as QE vote increases to 6-3, considers rate cut
Kiwi drops on milk fears and dovish CB rhetoric
Nikkei 0.84% Europe -0.9%
Oil $96.82/bbl
Gold $1602/oz.

Europe and Asia:
AUD Conference Board Leading Index -0.1% vs. -0.2%
JPY Merchandise Trade Balance -0.68T vs. -0.59T
JPY All Industry Activity Index 1.8% vs. 1.6%
CHF ZEW Survey 10.0 vs. -6.9
GBP BOE Minutes 6-3 for QE
GBP Jobless Claims -12.5K vs. -5.3K
GBP Avg Weekly Earnings 1.4%
GBP ILO Unemployment Rate 7.8%

North America:
USD Housing Starts 8:30
USD PPI 8:30
USD Fed Release Minutes Jan 29-30 Meeting

Cable was hammered in early European trade today when the release of the BOE minutes revealed that the MPC vote on increasing QE saw it margin rise to 6-3 indicating that UK monetary policymaker may be moving closer to additional easing. Governor Mervyn King joined Paul Fisher and David Miles in voting to increase QE by another 25 Billion to 400 Billion.

The news instantly sent cable tumbling through the 1.5400 level and pushed it all the way to 1.5305 by morning London trade as traders dumped the unit wholesale on fears of further devaluation by BOE. The minutes showed that the committee considered cutting rates but noted that further monetary stimulus alone was insufficient in propping up demand.

The UK monetary officials are clearly frustrated by the lack of growth in the economy and appear to be running out of any viable policy options. The UK economy registered its third quarterly contraction in Q4 of 2012 since the credit crunch of 2008 and shows no signs of gaining traction.

Cable was further hurt by rumors earlier in the Asian session that the S&P may downgrade UK sovereign debt. Last December the agency affirmed UK’s AAA status but revised the outlook to negative. The ratings agency refused to confirm speculation that the UK rating may be lowered further, but the currency markets reacted nevertheless.

Most of the flows however were centered in EUR/GBP which gained nearly 30 points during what is typically a very quiet Asian session. The pair then spiked to a high of 8765 in the wake of the BoE minutes release to register fresh high for the day. In a complete turn of events the euro is now acting a “safe haven” part of the cross as traders become increasingly concerned about UK economic conditions and the state of the country’s large debt to GDP ratio which ballooned in the aftermath of the 2008 credit crisis.

So far cable has been able to find bids ahead of the 1.5300 barrier, but the outlook on the pound remains extremely bearish with every rally now likely a sell as sentiment will not shift until currency markets see some evidence of pick up in economic activity.

Elsewhere in New Zealand the kiwi was rocked for more than a penny, after commentary for RBNZ chief Graeme Wheeler suggested that New Zealand dollar was overvalued and that the central bank stood ready to intervene if necessary. Mr. Wheeler wanted investors to know that the kiwi was not a one way bet, referring to currencies recent strength. The news helped to push the unit to a low of 8377 after it suffered earlier losses on reports that China may have destroyed 100 kg of milk powder on fears that it was contaminated. The New Zealand Fonterra corporation denied those reports and the kiwi recovered. Today’s action however, suggests that NZ monetary authorities are becoming increasingly sensitive to the strength of the exchange rate especially as the kiwi nears the key 8500 level and therefore may become more aggressive in the actions should the pair push higher through those levels.

In North America today the calendar is relatively light with only housing data and PPI on the docket. USD/JPY remains subdued in its 93.00-94.00 range but if the housing nes surprises to the upside the pair could try to make another run at the 94.00 level as the day proceeds.

Boris Schlossberg
Managing Director

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