- BOE voted 5-4 for interest rate hike
- Aussie inflation drops sharply
- UK Q4 GDP fastest growth in 3 years
There were speeches from the Governor of the Bank of England and the
President of the United States last night and whilst the Mr Bush’s
state of the union address was, with the exception of a cut in fuel
usage, bland even though he spoke about “terrrrists”, Mervyn king’s was
quite enlightening. He predicted UK inflation would ease in Q3 of 2007
and suggested that the surprise UK interest rate hike at the start of
January was a pre-emptive move to avoid further and harsher hikes in
the future.
This ‘stitch in time’ approach was seen as encouraging and the fact
that we now know the Monetary Policy Committee’s 9 member votes were
evenly split at 5-4 on the last interest rate hike, has allowed the
Pound to slide a tad from the highs seen yesterday. With four of the
nine members of the MPC voting to leave UK interest rates on hold, it
took the wind out of the sails of those who forecast a succession of UK
interest hikes in the first half of the year. It even swept past the
news that the UK economy grew at the fastest pace in 3 years. So
Sterling lost ground overnight against everything apart from the Aussie
Dollar overnight so I’ve covered the reasons for the Dollar’s weakness
below.
Today’s data diary looks full but you have to be interested in
Belgian business confidence and Swedish unemployment to be watching the
newswires closely. Tomorrow will be a far livelier day but it looks
like the Pound will be viewing Thursday from a lower vantage point.
I hope yours is a good Wednesday and that the snow doesn’t disrupt
things too dramatically. My journey was interspersed with evidence that
some people believe ‘FWD’ doesn’t stand for ‘Four Wheel Drive’ but
‘Forward Without Danger’ or even, when it comes to snow, ‘Forgot What
to Do’.
The fall back in the Pound has pulled GBPUSD back below the channel
top that it was testing yesterday. Those who thought they might finally
fill their boots at $2.00 to the Pound may need to keep your powder dry
for a little while longer and those who need to sell USD in order to
buy the Pound might just get the chance to do so in the coming days.
None of this suggests the upward trend which has been in place for 8
years is over, but within any trend there are intra-day, intra-week and
intra-month highs and lows and yesterday was just one of the highs.
In
fact GBPUSD could get down to $1.60 without disturbing the upward
trend. More likely we will see a dip to somewhere above $1.87 and then
another push higher. By that time, $2.00 may well be within range and
everyone’s forecasts will come true and all those pundits can claim to
be mystically charged with foretelling energy. However, a short term
drop and the subsequent recovery relies on the Bank of England
maintaining it’s interest rate hiking bias and relies on the US Dollar
remaining relatively well placed as far as international investment
flows are concerned. None of this, as the BOE minutes have shown, is a
forgone conclusion and we should remain wary of any dips in GBPUSD
because they may accelerate if the underlying reason for the move
changes from profit taking dips into a fully fledged correction.
Given
that the GBPUSD traded to a 14 year high yesterday we recommend USD
buyers act sooner rather than later before the inevitable correction
starts. Whilst the magic $2.00 may be breached either in this wave or
next, we are very likely to see a correction of some magnitude and so
the risks remain far greater on the downside then they do on the
upside. In numbers terms the upside could be limited to a couple of
cents whilst the downside could be as large as 12 - 17 cents which on a
£500,000 transaction equates to a £5,000 reward for a £46,000 risk.
Whether this is a risk worth taking is up to you but if our client
trading book is anything to go by, we are clearly seeing our corporate
clients reviewing their next 12 month USD expenditure and covering
sizable chunks at these fantastic levels. Similarly our Private
Client’s are doing the same and are buying their anticipated
requirements on Forward Contracts to ensure they don’t miss out. If
you would like to follow suit, please give your FX Consultant a call.
strategy for you.
As mentioned above, the Pound is on the back foot against all comers
this morning but it has gained against the Aussie Dollar overnight. The
reason for the AUD weakness is the release of Australian Inflation
figures which surprised the markets on the downside. Aussie inflation
was at just 2.3 percent in Quarter four of 2006 on an annualised basis
and that is well below the market forecast of 3.6 percent.
You
may have been woken by the sigh of relief which emanated from the
Reserve Bank of Australia as they realised that they may not have to
hike Aussie interest rates as much as previously envisaged and the sigh
of relief from international investors who sold some of their AUDs
because it was clear that they needed to unwind at least a proportion
of their carry trades. That unwinding caused some Japanese Yen strength
and allowed the GBPAUD exchange rate to rally to levels not seen since
October 2006 and not breached since December 2004.
This brings
GBPAUD to the cusp of a change as the upward trend, which has remained
pretty well intact since mid-2005, has looked like petering out in the
past few weeks. Last night’s move initially looked like it would change
all that and the upward direction of the trend would be reinvigorated.
However, for it to regain some pace, we would need Sterling to be in
demand and yet that demand is just looking like it is ebbing away in
the aftermath of Mr King’s speech and the BOE voting.
In
essence, today has the unmistakable appearance of a gift horse and it
would be churlish to look it in the mouth. Buying AUD around A$2.50
against the Pound is everyone’s wish and today offers that chance but
it may not last for very long at all so please don’t say we didn’t warn
you. If you would like to buy Aussie Dollars at A$2.50 - which has not
been breached for over 2 years - please give your FX Consultant a call.
If all economists were laid end to end, they would not reach a conclusion.
George Bernard Shaw
FX Research and Analysis undertaken by:
David Johnson - Halo Financial
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