Major Overnight Headlines
• INR liquidity very low as USD/INR hits new record high; other developing market currencies more stable
• Euro Area July lending to non-financial corporations falls 3.7% (record low growth rate)
• Britain to put forth draft resolution on Syria to UN Security Council later today, Thomson Reuters
We can’t see how the trade-weighted value of the GBP will sustain itself at new lows after Mark Carney’s prepared remarks today without some type of very noticeable language nuance, be it in relation to the usage of QE to add further weight on the curve, some new, dovish spin on UK growth or an explicit focus on the value of sterling as a policy input. Unless such surprises are embedded within the remarks this afternoon, we look for broad GBP price action to mimic that of the August Inflation Report session: a kneejerk move lower followed by a moderate rally off the lows into the London close. At the same time, we would expect the GBP to end the day broadly lower, as the central message from the BoE will probably be to keep the financial markets at large orientated to the low rates (weak GBP) guidance. We need to keep in mind that there is supposedly a news conference after the prepared remarks, so one obvious strategy would be to stick to the script with the official text, but then use the news conference to say something a bit more “juicy and rugged”, aimed solely at those in the financial markets who have “veered off” the BoE’s desired course somewhat.
That the financial markets are pining for an aggressive verbal nuance from Carney today is evidenced by the move in the 2-year GBP swap rate so far this week, already down around 4bps heading into the speech. Implicitly, this raises the hurdle for the BoE to overcome today if it desires to set rates and the GBP on a new lower trend heading into the final month of Q3.
Read the full report: FX Daily
BMO