Interest rate hikes on the cards sooner than later

It was a very quiet day for fundamental data out of the UK yesterday. All eyes and ears waited eagerly on Mark Carney’s speech at the Institute and Faculty of Actuaries General Insurance Conference held in Wales. As most expected, he signalled an interest rate hike is on the horizon and looming ever closer, however, further details or dates were not disclosed. It was clarified the move would be data-dependent. The head of the Bank of England did stress once the rises start they would be carried out in a gradual manner due to weak export demand and high public and private debt. Following these comments, we saw Sterling rally up and above the 1.6300 interbank handle peeking out at 1.6330(IB) before gradually retracting back beneath 1.6300(IB) as play closed. Sterling also gained against the euro as their policy divergence continues. Despite the fact that the Bank of England is still partaking in quantitative easing it is, however, expected to slow down. Within the Eurozone, the consensus is that more easing will be needed in the coming months. As long as we continue to see economic recovery in the UK, this policy divergence will continue, seeing Sterling continue to gain against the euro.

Stateside yesterday we saw Durable Goods Orders figures released showing bearish readings of -18.2% against a -18% consensus. This followed a 22.6% reading in July. At the same time, initial jobless claims rose to 294k versus a consensus of 300k. Despite these figures not quite meeting consensus they were close to forecasts; EUR/USD showed very little reaction to these figures and held up around the 1.2720 (IB) levels having just recovered from new lows of 1.2696(IB). The US Federal Reserve could start to hike interest rates between Spring-Summer 2015, at the earlier end of market expectations - this was implied by Richard Fisher, the Fed’s main policy maker, at a speech in Rome. Like Carney, neither date nor more light were shed on the matter: “I won’t say what we’re saying internally, that would not be appropriate, but maybe sooner rather than later.”

Following suit, there was little to no fundamental data out of the Eurozone yesterday (or today) with speculators driving market movements. However, weak Eurozone lending data highlights the need for ECB stimulus, especially in crisis-stricken countries where lending to households and companies has continued to tighten. The ECB has now started to offer banks four year loans at ultra-cheap rates with plans to buy asset-backed securities from October to ease pressure on banks and their balance sheets to entice them to lend. In August, loans to the private sector continued to fall, down 1.5% from August the previous year after a contraction of 1.6% in July. This was shown by the ECB yesterday and highlights the fact that private sector loans have not grown since April 2012. Draghi told Lithuanian business daily, VersloZinios, in an interview published yesterday that weakness in credit growth is likely to curb the Eurozone recovery.

In New Zealand, Governor Wheeler yesterday stated that the Kiwi exchange rate is unjustified and unsustainable and is prone to a significant downward adjustment. Wheeler went on to say that when the New Zealand dollar begins declining from an unjustified and unsustainable level in the past the adjustment has been drastic.