Major Overnight Headlines
• UK Index of Services up 0.5% on a 3m/3m basis (0.6% expected); YoY growth in finance services still negative
• UK Nationwide House Price Index rises 5.0% YoY in September (4.4% expected) as Carney says ‘no’ to more QE
• Japanese core CPI falls 0.1% YoY in August, in-line with expectations
• Swedish retail sales rise 0.3% MoM in August versus a rise of 0.4% expected
The strength in the GBP following Carney’s QE remarks and UK house price data for September seemed exaggerated. Since the July MPC meeting, not a single Committee member has voted for an additional round of QE. Moreover, when you strip out inflation and the impact of London prices, UK house prices aren’t really doing that much. They’re barely even rising faster than nominal incomes. The BoE is probably a good distance away from having to deal with problems here, but even if it weren’t, would interest rates be the tool it would use to deal with them? We’re not at all convinced the answer to this question is ‘yes’.
The CHF has been the best performing G10 currency versus the USD since the Fed decided not to taper its QE3 programme in September, and this makes the persistent, moderate bid tone in the CHF rather intriguing. We see a pressure point here in the CHF to the upside until it becomes clear that the Fed doesn’t wish to extend the ‘no taper’ beyond the January FOMC at most. There are obviously QE-induced capital flows and central bank balance sheet sotries implied by CHF strength. There is also, however, an element of uncertainty regarding credibility and the outlook in general regarding the Fed’s decision not to taper in September, meaning CHF strength may also be indicative of other types of flows as well. Fiscal-related event risk in the US is clearly building, but we’re not sure the market attaches a materially high probability to a government shutdown and/or no debt ceiling hike actually occurring. There are probably other factors at work in CHF strength.
Read the full report: FX Daily
BMO