Cable Ignores Dovish Carney and Blasts Through 1.5400

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Marker Drivers for August 7 2013
USD/JPY drops below 97.00 after Nikkei crashes -4%
Carney: rates will be low for a long time
Nikkei -4.00% Europe -0.05%
Oil $105/bbl
Gold $1275/oz.

Europe and Asia:
AUD AiG Performance of Construction Index 44.1 vs. 39.5
AUD Home Loans 2.7% vs. 2.2%
NZD Unemployment Rate 0.4% vs, 0.4%
NZD Employment Change 6.4% vs. 6.3%
CHF SECO Consumer Confidence -9 vs. -2
EUR German Industrial Production
GBP BOE Inflation Report

North America:
CAD Building Permits 8:30
CAD Ivey PMI 10:00

Cable went on a wild rollercoaster ride today first plunging to just above the 1.5200 level only to rebound quickly and rise through the key 1.5400 mark in reaction to Governor Mark Carney, first press conference in which he outlined the BOE forward guidance.

For the first time ever Mr. Carney tied UK monetary policy to the unemployment rate stating that the current accommodative stance will not change until the rate drops to 7%. Mr. Carney did qualify the position by stating that there were three knockouts that could lead the MPC to assume a more hawkish posture. The three knockout provisions were that inflation remain within 0.5% of target goal within 18-24 time frame, that medium term expectations continue to remain well anchored and that the current policy does not cause any “threat to the financial stability” of the UK banking system.

The three caveats served as escape clauses for BOE’s current highly accomodative stance, and despite Mr. Carney intention to communicate a rather dovish message, the markets ignored his words and focused instead on the knockout clauses with special attention to the inflation contingency which some market participants viewed as a more difficult target to attain then the unemployment rate.

In short Mr. Carney clearly communicated that the BOE intends to keep interest rates at a low level for a considerable period of time, but did not offer any new stimulus measures and as such cable rallied on relief. Still today’s press conference clearly shows that Mr. Carney’s dovish impulses remain place and should UK economic data begin to falter, the BOE is more than prepared to provide more stimulus to the system.

Therefore today’s relief rally, strong as it is, may find resistance above the 1.5500 level unless UK data continues to surprise to the upside. In an environment when all G-10 central banks are highly sensitive to appreciation in the currencies, today presser by Mr. Carney may have backfired and if cable continues to climb higher threatening the recovery. Mr. Carney may become more explicit in his communication.

For now however, the market is clearly bullish sterling as it views the rhetoric as nothing new and the pound now targets the 1.5500 level as the day proceeds while it continues to gain strongly on the crosses with EUR/GBP more than 100 points off its highs while GBPAUD making fresh yearly records.

Boris Schlossberg
Managing Director

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