Morning Brief – Thursday 13th

Rate Decisions All Around:

The United Kingdom, the European Union and Turkey all have interest rate decisions today. The order of importance and excitement is likely to follow that direction; with Turkey facing a pivotal and future-defining moment and little expected to occur at the Bank of England. There remains risk around the Euro as global growth projections threaten to harm the space for monetary tightening within the European single currency. Markets will look for the diamond in the rough of Mario Draghi’s dulcet tones. The Lira trades weaker on the day with the Rand holding firm and 0.5% stronger intraday. The Rand succumbed first to weakness in the Lira precipitating a sell off within emerging markets. Should the Turkish central bank disappoint once again today, eyes will soon turn to the Rand.

• GBP: The Bank of England Rate decision at midday today is expected to be a non-event, with no press conference scheduled afterwards and minutes expected to reveal little.

• EUR: Global growth is in focus from the US trade war, cold feet in Europe could need Draghi to confirm that the ship is still on course for a Summer 2019 rate hike.

• USD: Weakness in the Dollar yesterday came amidst an announcement that China and the US will entertain further trade talks.  

• EM: Turkey stands before a precipice with the Rand praying it won’t fall.

Pound Sterling:

Decision One – Business as usual:

Despite an interest rate decision in only a few hours’ time, Sterling is trading casually with unexceptional risk behind it. Following a 25 basis point hike last month, there is a consensus that there remains zero likelihood of a hike or change to guidance today. The non-event is likely to occur given yesterday’s wage growth reading which showed wages picked up in July amidst a strengthening labour market. Pay still remains below the level of 2008, however, the mild up-tick in wage inflation will allow the Bank to justify last month’s decision and hold the forward guidance unchanged.

The Euro:

Decision Two – On the line?

The Euro has caught a bid in the past week following the passing of the risky Swedish elections and the growing promise of a UK post-Brexit trading relationship. However, markets will look towards Mario Draghi, ECB president, for confirmation that the Eurozone economy can still cope with the cessation of stimulus programmes this December, and a first rate hike in Summer 2019. Given the uncertainty still surrounding trade at the moment, there remains the strong possibility that Draghi will skirt around these issues, thereby not providing the clarity that the market needs to reward the Euro with value. My advice? Get short the Euro!

The Dollar:

Good news is Bad:

The US agrees to re-entertain talks with China to potentially improve the prospects for global growth, let alone US and Chinese growth. It may seem remarkable then, that the US Dollar shaved as much as 40 basis points off of its value upon receipt of the news. The reason is that defensive Dollar Demand lapses and the ultimate safehavens (US treasuries and the Dollar) lose some value. With the volatility of President Trump one of the world’s ultimate known unknowns, who knows how long the trade ceasefire will last.

Emerging Markets:

Decision Three – Take Cover:

President Erdogan has already caused the Turkish Lira to tank this morning ahead of today’s interest rate decision. Erdogan mentioned the forthcoming measures to stem currency devaluations and stuck by his desire to cut interest rates in order to promote growth. Markets are looking for dramatic rate hikes in order to stem the bleed of the Lira, however, with the borderline dictator taking yet more control over the Turkish economy, who knows what the central bank will get away with. Upon this news, the Lira fell 3% against the Dollar (at around 10:15AM), to re-break through 6.50. The Rand also unmistakably sold off by up to ten basis points in a direct correlation with the Turkish/Emerging Market Risk. Should the situation continue to develop throughout the afternoon, we might expect serious devaluations of the Rand by consequence. Eyes peeled, take cover!

Discussion and Analysis by Charles Porter

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