BOE GIEVE PROPOSES POSSIBLE UK JAPAN-STYLE RECESSION

BOE GIEVE PROPOSES POSSIBLE UK JAPAN-STYLE RECESSION

There was a distinct scent of risk hunger in the air for global money markets yesterday, weakening the Dollar and the Yen and boosting higher risk currencies including the Euro and the Pound. As anticipated, GBP/USD moved upwards to the low 1.44 region before pulling back to settle in the 1.43s with GBP/EUR also testing the mid 1.13 level before pulling back to the high 1.12 area. This came largely off the back of short Dollar positions as investors pulled funds out of the currency to make some tentative emerging market and Eurozone purchases, although a cutting of speculation on a rising Dollar also had a large part to play in the moves which brought EUR/USD back to 1.27 once again.

What prompted the above was a reaction to a bundle of economic data from the US which attested to a growth in money supply in the region over the last month. This information, largely comprised of US leading economic indicators and Producer Price Indices, which were both out at much better than expected, could potentially be taken as one of the first faint glows of a return to healthy inflation later in the year as the money supply is boosted and consumers begin to resume normal levels of spending. Bearing in mind that this is no means a given, the market has only reacted very cautiously, but there does seem to be a sense of some optimism out there that, at the very least, the Fed and US Government monetary and fiscal measures of the last months are having some positive effect in destroying the brunt of deflation.

Stability also the name of the game Sterling-side yesterday as a few pieces of data vied to wrestle the Pound one way and the other, leaving the currency pretty undecided overall. On the one hand, Government data showed a truly terrible Public Sector Surplus over the last months of 3.3bn Pounds, in the month of the year that is meant to net the most money from the taxpayer, whilst on the other, figures on UK corporate debt showed a decent decline in yields over the last month. In laymen’s terms, this has broadly been taken by the market as an indication that the Bank of England’s purchase of commercial paper over the last month is working in lowering borrowing costs where liquidity is needed most. The Public Sector figure is extremely disconcerting though.

Today is likely to see GBP/USD pull right back in response to end of the week and year-end corporate Dollar demand. GBP/EUR will likely benefit from EUR/USD weakness although the currency pair can be expected to see an upside of around 1.1350 thanks to comments from John Gieve of the Bank of England last night, which, in his last ever address as a policymaker, highlighted his view that the UK is potentially facing the risk of a decade-long ‘Japan-style’ recession. Also expect volatility this morning around UK Retail Sales which, in combination with some Eurozone manufacturing data will probably lead to quite a stagnant Sterling market with GBP/USD moving around the 1.42-1.43 mark.

Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx

This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.

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