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21 Mar 2013
Fundamental Morning Wrap: BoE remit pivot tops focus... for now
FXstreet.com (Barcelona) - Good morning, how do you do? This mornings institutional research has a strong UK focus, as the aftereffects of the UK budget have been absorbed overnight. The shift in mandate for the BoE has come under focus, while in Europe, Cypriot events remain in key focus, but for now at least, the appetite for relentless coverage looks to have damped for now.
GBP
Brian Martin & Amber Rabinov of ANZ believe that the UK budget was at best neutral of GBP, but the focus on monetary activism implies further, near term easing in monetary policy. They feel that sub-trend economic activity and an absence of wage inflation suggests that any inflation feedback from the exchange rate will prove temporary. They write, “With inflation expectations broadly stable, sterling's weakness should not be an obstacle to further easing.” Overall, they feel that the pound has benefitted from the crisis in Europe and a shake out of long USD positions. This may run further in the near term, but it does not alter the argument that the economy could benefit from a real depreciation in the exchange rate.
Lee Hardman of BAML notes that GBP is continuing to stabilize in the near-term following the less dovish than expected BoE minutes which indicated that further QE does not yet appear imminent. He writes, “The Chancellor’s update to the BoE’s policy remit in the Budget yesterday reinforced its shift to more flexible inflation targeting with more explicit forward guidance under new Governor Carney more likely than a more aggressive shift to a nominal GDP target.” Danske Bank analysts comment, “Low growth, high inflation, fiscal tightening and monetary easing are not a currency-friendly mix and we still see downside risks for sterling.”
ING Analysts note that today´s Retail Sales numbers offered a positive short term surprise this morning, jumping 2.1% MoM in February, offering hope that the UK could avoid its third technical recession in five years. Overall, they write, “While sterling has bounced on today’s data, we believe it will be temporary move with downside risks, particularly against the dollar, set to remain a long term theme.” UBS analysts Gareth Berry and Geoffrey Yu note that the new BoE remit will be similar to the US Fed´s approach, but as the the BoE and Fed will be starting at very different points, and points at which the unilateral policy effect on the currency also differ, they expect GBPUSD in particular to begin assuming different reaction functions once the BoE begins to execute the new remit in Q3 or Q4 this year.
EUR
Michaela Moran of BAML notes that asset price as already depressed in peripheral Europe, with the Cypriot stock market down 98% from its highs. For effect, she notes that the US bleach manufacturer Clorex now has a larger market cap than the Greek Equity market. She writes, “This suggests Cyprus needs to generate some seriously virulent financial contagion via a default in coming weeks if the recent "seller's strike" in equity & credit markets is to come to an abrupt end.” Lee Hardman of BTMU adds that Russian Prime Minister Medvedev has heavily criticised the EU’s handling of the Cyprus debt crisis saying the Eurogroup should include Russia in their plan.
USD
Lee Hardman of BTMU notes that the FOMC overnight was little unchanged from January although the Committee noted that the economy appears to be returning to “moderate growth following a pause late last year”. OCBC Bank comments that Bernanke hinted at his own exit, quoting him as saying, “I don't think that I am the only person in the world who can manage the exit” after talks with President Obama. Danske Bank analysts add, “Consensus in the market appears to be for the Fed to scale down asset purchases before year-end but this is unlikely to materialize this side of the summer which means that pressure remains on the dollar from monetary policy.”
GBP
Brian Martin & Amber Rabinov of ANZ believe that the UK budget was at best neutral of GBP, but the focus on monetary activism implies further, near term easing in monetary policy. They feel that sub-trend economic activity and an absence of wage inflation suggests that any inflation feedback from the exchange rate will prove temporary. They write, “With inflation expectations broadly stable, sterling's weakness should not be an obstacle to further easing.” Overall, they feel that the pound has benefitted from the crisis in Europe and a shake out of long USD positions. This may run further in the near term, but it does not alter the argument that the economy could benefit from a real depreciation in the exchange rate.
Lee Hardman of BAML notes that GBP is continuing to stabilize in the near-term following the less dovish than expected BoE minutes which indicated that further QE does not yet appear imminent. He writes, “The Chancellor’s update to the BoE’s policy remit in the Budget yesterday reinforced its shift to more flexible inflation targeting with more explicit forward guidance under new Governor Carney more likely than a more aggressive shift to a nominal GDP target.” Danske Bank analysts comment, “Low growth, high inflation, fiscal tightening and monetary easing are not a currency-friendly mix and we still see downside risks for sterling.”
ING Analysts note that today´s Retail Sales numbers offered a positive short term surprise this morning, jumping 2.1% MoM in February, offering hope that the UK could avoid its third technical recession in five years. Overall, they write, “While sterling has bounced on today’s data, we believe it will be temporary move with downside risks, particularly against the dollar, set to remain a long term theme.” UBS analysts Gareth Berry and Geoffrey Yu note that the new BoE remit will be similar to the US Fed´s approach, but as the the BoE and Fed will be starting at very different points, and points at which the unilateral policy effect on the currency also differ, they expect GBPUSD in particular to begin assuming different reaction functions once the BoE begins to execute the new remit in Q3 or Q4 this year.
EUR
Michaela Moran of BAML notes that asset price as already depressed in peripheral Europe, with the Cypriot stock market down 98% from its highs. For effect, she notes that the US bleach manufacturer Clorex now has a larger market cap than the Greek Equity market. She writes, “This suggests Cyprus needs to generate some seriously virulent financial contagion via a default in coming weeks if the recent "seller's strike" in equity & credit markets is to come to an abrupt end.” Lee Hardman of BTMU adds that Russian Prime Minister Medvedev has heavily criticised the EU’s handling of the Cyprus debt crisis saying the Eurogroup should include Russia in their plan.
USD
Lee Hardman of BTMU notes that the FOMC overnight was little unchanged from January although the Committee noted that the economy appears to be returning to “moderate growth following a pause late last year”. OCBC Bank comments that Bernanke hinted at his own exit, quoting him as saying, “I don't think that I am the only person in the world who can manage the exit” after talks with President Obama. Danske Bank analysts add, “Consensus in the market appears to be for the Fed to scale down asset purchases before year-end but this is unlikely to materialize this side of the summer which means that pressure remains on the dollar from monetary policy.”