Morning Brief – Friday 14th

Tame; Light volatility; Grab a handrail:

Yesterday’s three interest rate decisions fell into place as predicted. A tame and uneventful Bank of England rate decision saw the Pound do little more than flutter. With a 9-0 vote within the Monetary Policy Committee and interest rates being held at 75 basis points, expectations were met in full. European growth forecasts were revised downward during the European Central Bank’s policy decision with Draghi maintaining that global risks remain balanced. Another hold of its main refinancing rate at 0.00% and a promise to end the asset purchasing (QE) program this year led to only a mild fall in the Euro. Leading up to the decision the Euro traded around 10 basis points shy of its value at market open. In Turkey, things hit the fan. Following the misleading words Recep Erdogan, the Turkish central bank raised interest rates by 625 basis points to take the one-week repurchasing repo to 24%. The price action within the Lira had a considerable spill over throughout emerging markets, with the Rand trading as much as 1% stronger yesterday.

Since Market Open:

• GBP: 9-0 no hike sees Sterling trade horizontally. Positive Brexit sentiment allowed Sterling to appreciate throughout the afternoon yesterday.

• EUR: Growth forecasts for 2018 and 2019 are revised down as the picture for inflation remains optimistic with monetary preferences unchanged in Frankfurt.

• USD: Improving risk sentiment continues to constrain defensive dollar demand as the greenback loses ground against the Euro (1.17) and the Pound.  

• EM: Monetary policy action from Turkey’s central bank awards up to 4.5% of value back to the Lira. USDTRY briefly kisses 6 Lira to the Dollar where considerable resistance lies.

Pound Sterling:

Carney mounts the property ladder:

Having not had the opportunity to speak at a press conference following yesterday’s interest rate decision, Carney apparently couldn’t resist stick his oar where it’s not particularly wanted this morning! Speaking in front of silenced ministers, the Governor of the Bank warned that a no-deal Brexit would result in housing prices being 35% lower, ceteris paribus, within only three years. What’s more, Carney and his Bank of merry Monetary Policy Committee members could do nothing to support the domestic economy and currency. Sterling has caught a bid this morning perhaps reflecting the Governor’s suggestion that a Brexit executed to the letter of the Chequers agreement will cause the bank to revise growth forecasts upwards with tighter monetary policy on the horizon.

The Euro:

360 Vision:

Without wanting to gloat, but perfectly happy to give it a go, I hope at least someone out there took advantage of yesterday’s call to go short on the Euro! Well, it would have paid off if you did. A revision downward in European growth rates yesterday afternoon by the European Central Bank depressed the Euro. In the absence of great confidence from Mario Draghi that risks remain outside of the Euro, the European single currency could not gain traction. Affirmative action by the Turkish central bank to shore up losses in the domestic currency had a limited and net positive effect on the Euro. Focusing on the European economy’s path forward whilst keeping a mindful eye on emerging market risks and global growth, the ECB was forced to keep its wits about it and mindful eye all around.

The Dollar:

Flashing Red:

The US released salient price level data yesterday afternoon. Consumer price inflation data undermined the Dollar with annualised August prices coming in at 2.7% versus 2.9% previous reading and 2.8% consensus expectation. The stumble in inflation led market participants to questions the long run sustainability of Federal Reserve monetary policy tightening; the major driver of a strong 2018 Dollar. Employment figures did not disappoint as heavily as price inflation data, however, still came in below consensus forecast.

Emerging Markets:

TRY and drag me down:

An interest rate in double figures on a one-week repo rate is unsustainable with respect to growth and stability. It’s a clear signal of an economy in distress that needs to reward investors and traders with so much value that, despite the risk, they can’t help but invest in the domestic economy and currency. That’s what Turkey did yesterday, raising its rate to 24% in a last-ditch attempt. Weeks ago, we began to grow concerned over the correlation of the Rand to the basket of distressed basket of EM currencies; the Venezuelan Bolivar and the Turkish Lira to name but a couple. This correlation is not over. Despite a premium of risk admittedly priced into the Lira, Turkey continues to weigh on the South African currency. At present the correlation is considerable with a level of significance surpassing the 30% threshold.

Discussion and Analysis by Charles Porter

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