Dovish BoE inflation report could put some pressure on GBP
Sterling’s recent underperformance may have been stabilised by Tuesday’s slightly better-than-expected industrial production data, but today’s key event – the BoE Inflation Report – could lead to some renewed weakness. Our economists expect a dovish report and, given that the recent weak data, the MPC’s two-year inflation projections are likely to be revised lower. This could put the GBP back under pressure today, particularly as the press conference is also likely to reinforce a dovish tone from the MPC. Nevertheless, we view that scope for substantial sterling weakness is limited – the interest rate market is already pricing in a very high likelihood of the BoE cutting rates by November, while our positioning analysis shows that long GBP positions have been reduced considerably in recent weeks. We remain positive on the GBP beyond the very short term against both the USD and the EUR.
BoJ kicks off its two-day meeting while STEER indicates upside risk to USDJPY
The BoJ kicks off its two-day meeting today with some expectations in the market that the BoJ could pursue further easing. Hence, we could see some upward pressure on the JPY increase if the BoJ stands pat. Increasing expectations of further QE from the Fed has been a driver of USDJPY’s decline towards 78 over the past month. However, BNP Paribas STEER currently indicates that the recent rise in risk appetite, which is typically a negative for the yen, could lead to move higher in USDJPY. The MSCI World Index has risen almost 6% over the past two weeks; prior relationships suggest that this should correspond to approximately a 2% rise in USDJPY and the fair-value currently stands at 79.70.
Quiet summer markets linger; risk-on positions susceptible to profit taking
The summer lull in markets has continued during the Asia session overnight. The most exciting breakthrough has been the S&P 500 closing above 1400, but this appears to have triggered some profit taking in the likes of the EUR, AUD, CAD and NZD. With Bernanke not scheduled to speak until Jackson Hole at the end of the month, investors holding long risk positions may become concerned that the current risk-on rally could loose some of its momentum. Fed President Rosengren this week has so far been supportive for QE3 expectations, but there are very few scheduled events from the Fed over the weeks ahead. Kocherlakota and Lockhart speak on the 16 and 21 of August, and the FOMC minutes from last week’s meeting are published on 22 August. The USD may therefore become susceptible to bouts of strength over the weeks ahead on any profit taking, but we expect such moves to be temporary and provide opportunities to position short USD vs the commodity currencies ahead of Jackson Hole and the FOMC meeting on 13 September when our economist expect the trigger on QE3 to be pulled.
RBA scales back market expectations of easing
Following Tuesday’s RBA meeting the market has scaled back its expectations of aggressive RBA easing and is now pricing 55bp of cuts over the next 12 months vs the 75bp priced in before the meeting. The RBA seemed more upbeat on China’s growth prospects citing that it “does not appear to be slowing further”. The statement also highlighted that most domestic indicators suggest that growth is close to trend. With the market scaling back expectations of a cut from the RBA, the AUD has the potential to push higher. However, the key threats to the AUD rally will be both the Chinese data out this week and the Australian employment report on Thursday. Chinese data will be especially important, considering that the RBA highlighted that the economy does not look to be weakening further. Our view is that Chinese data for July should show signs of a recovery as pro-growth policies start shining through.
BNP Paribas