Headlines
- BoE hawks revert back to doves – 9-0 vote against hike hurts Sterling.
- British unemployment hits fresh 6-yr low – UK wages up 1.7%.
- ECB policy announcement due at 12:45 – Euro could weaken on large QE plan.
- BoC shocks market with 25bps rate cut – Sends CAD, AUD & NZD tumbling.
Sterling
The Pound suffered sharp declines against the Euro and the US Dollar yesterday morning as investors opted to sell Sterling in reaction to a dovish minutes report from the Bank of England. Yesterday’s minutes showed that after five months of voting for a rise in rates, BoE policymakers Martin Weale and Ian McCafferty opted to retract their support for tighter monetary policy in January. The minutes from this month’s meeting showed that the former hawks were swayed by the recent plunge in UK consumer prices, which they feared could lead to a period of disinflation if monetary policy were to be tightened. The report detailed that BoE officials perceive there to be a ‘roughly even chance’ that inflation could dip below zero over the next six months.
The shift in central bank rhetoric was a shame because without it the Pound may have fared well yesterday. This is because British unemployment beat estimates of 5.9% by sliding from 6.0% to 5.8% in November – a new six-year low. Even more encouragingly, average weekly earnings accelerated from 1.4% to 1.7% – a full 0.7% higher than November’s 1.0% CPI score. But alas, the upbeat labour market report, which bodes well for Britain’s medium term inflation outlook, was overshadowed by the short term impact of the BoE’s dovish minutes report.
Euro
The Pound to Euro exchange rate tumbled by around half a cent yesterday in reaction to the unexpected revelation in the latest BoE minutes report that policymakers voted 9-0 in favour of leaving rates unchanged at 0.50% in January. The return to unanimity against hiking rates suggests that the Bank of England is now on the same page, so to speak, as financial markets: a page that says interest rates will not be raised until next year. The prospect of another twelve months of ultra-low interest rates, and therefore ultra-low yield values on UK Gilts, brought Sterling down a notch against the single currency.
However, there is potential for another surge in GBP/EUR this afternoon. The European Central Bank is widely expected to announce some form of quantitative easing in reaction to the recent plummet in Eurozone consumer prices, but the question remains: how much?
News outlets reported yesterday that they had received information from an official at the ECB, who did not want to be named, suggesting that the bank is preparing to launch a €50 billion per month asset purchasing programme. Now first things first: there is every chance that the ‘leak’ is a hoax. But let’s assume it is a genuine disclosure; the next question is what is the duration of the programme? If the QE scheme lasts for a year then it will amount to around €600 billion of purchases. If it is continued for two years then it will top the €1 trillion mark.
The general consensus among analysts is that the ECB needs to increase its balance sheet by around €1 trillion to have a serious impact on Eurozone consumer prices. Therefore the Euro could rally if a one-year €50 billion a month scheme is announced, but could weaken if the ECB opts for a longer duration.
US Dollar
Sterling depreciated by around a third of a cent yesterday as investors reacted to the surprisingly dovish BoE minutes report. American data printed confusingly: building permits sunk -1.9% but housing starts jumped 4.4%. Go figure. The mixed bag of US ecostats meant that demand for the ‘Greenback’ was fairly steady throughout yesterday’s session.
If the ECB opts to roll out a substantial quantitative easing scheme today then the risk-boosting announcement could potentially eat into the recent gains registered by the safe-haven US Dollar. However, in these days of extreme volatility it is especially difficult to predict central bank decisions, and indeed, the market reaction to them.
Canadian Dollar
The Pound to Canadian Dollar exchange rate rallied by over three cents to a five-year high yesterday afternoon in reaction to a shock announcement from the Bank of Canada.
Confounding all expectations, BoC Governor Stephen Poloz declared that the central bank had cut its benchmark interest rate -25 basis points from 1.00% to 0.75%. Mr Poloz said the ‘decision [was] in response to the recent sharp drop in oil prices’, which are currently over -50% lower than they were six months ago. The aggressive selloff in crude oil – Canada’s most profitable export – caused central bank analysts to reduce their 2015 Canadian GDP projections from 2.4% growth to 2.1%.
The dovish move caught markets completely off-guard – no forecasters had backed a BOC rate cut – and this led to a market-wide Canadian Dollar selloff. Marking a massive six-cent turnaround over the past two days, Sterling rocketed higher by 3.2 cents against the ‘Loonie’ when the news hit the wires.
In a tumultuous day of financial trading the Pound managed to register a two-cent daily gain against the Australian Dollar yesterday. This week was supposed to be about the European Central Bank, what with it being on the cusp of finally launching its own sovereign bond-buying scheme. But shock central bank announcements from the Swiss National Bank, the Bank of England and the Bank of Canada have all had huge impacts on the currency market over the last seven days.
GBP/AUD reacted badly to the BoE’s cautious minutes report yesterday but demand for the ‘Aussie’ collapsed following the BOC’s decision to cut interest rates in the face of falling commodity prices. The move cast a psychological cloud of anxiety over the Australian Dollar, as investors weighed up the possibility of the Reserve Bank of Australia following suit with a rate cut of its own.
The commodity-sensitive ‘Kiwi’ Dollar also felt the effects of the recent shift in central bank activity. With dairy prices having collapsed in a similar fashion to oil over the past 12 months, speculators sold the New Zealand Dollar in large quantities yesterday in response to the unexpected BOC rate cut, through fear that the Reserve Bank of New Zealand could be the next central bank to loosen policy. After setting a mammoth intraday swing of over four cents, GBP/NZD closed for the day two-and-a-half cents up at a two-week high.
Data Released Today
09:30 GBP Public Sector Net Borrowing (Pounds) (DEC) 9.0B
12:45 EUR European Central Bank Rate Decision (JAN 22) 0.05%
13:30 EUR ECB President Draghi Holds Press Conference
13:30 USD Initial Jobless Claims (JAN 17) 300K