King Kicks Sterling
Cable dropped 40 pips after Bank of England Governor King kept the door open to further Gilt purchases. Speaking after the quarterly inflation report was released, he said the MPC has (1) not lost faith in additional asset purchases as a policy tool, and (2) not decided to halt Gilt purchases permanently. The unspoken implication is that a resumption of QE in February remains a distinct possibility – a scenario that happens to be the base case of our UK economist. King also took the opportunity to talk down sterling, noting that the UK economy is likely to be slow unless the currency weakens. As for the inflation report itself, there was some modest upward revision to the forecasts, but inflation is still expected to linger slightly below the 2% target at the crucial 2-3 year horizon. USDJPY has also shown some movement, though we note that in addition to the overall Japanese political dynamics, we would be wary of taking our eyes off the bigger picture – US yields are depressed and are likely to remain so until clear signs of political compromise emerge on the US fiscal cliff issue, and this is likely to drag USDJPY lower again as year-end approaches. The prospect of accommodative Fed policy for longer should not be dismissed either – overnight Fed Vice Chair Yellen sounded even more dovish than current Fed guidance, opining that the optimal trajectory for US monetary policy would hold the policy rate near zero until early 2016. She also gave her backing to new proposals intended to help guide market expectations for when the Fed may start to hike interest rates. These would possibly include specifying numerical thresholds for the unemployment rate and inflation, although even if these thresholds were crossed, rate hikes would not automatically follow. In the immediate future though, the market is eager to understand what the Fed has in mind for the replacement (if at all) of operation twist and today’s FOMC minutes release could provide some initial forward guidance. Finally, another key central bank is signaling change – Beijing has released the list of new Communist Party Central Committee members and current PBoC Governor Zhou Xiaochuan was not named – a sign that he will be stepping down from the post. Wider changes at PBoC and SAFE in particular could have a major effect on G10 FX flows if diversification strategies change. Overnight USDJPY traded 79.39-80.11 while EURUSD traded 1.2701-1.2751. US retail sales are also out.
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UBS Investment Bank