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2c4439aa-8564-4872-b0f6-3562084cb130

18

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GBP collapsing on King comments

Wed, Oct 22 2008, 06:42 GMT
by Saxo Bank Strategy Team

Saxo Bank

Mervyn King had some extremely bearish comments yesterday.

MAJOR HEADLINES – PREVIOUS SESSION

• BoE's King-UK economy likely entering recession 

• British economy to shrink 0.9 pct in '09-NIESR think tank

• Australia Q3 CPI +5.0 PCT YR/YR vs +4.8 PCT expected

• NZ puts a cap on bank deposit guarantee scheme at NZD1 mln for retail investors

• BOC cuts rates by a less-than-expected 25bp

Key Events:

THEMES TO WATCH – UPCOMING SESSION

Market Comment

The Bank of Canada joined in the global rate cutting spree, trimming the overnight target rate by a less-than-expected 25bp to 2.25%. However, rates are now 75bp lower than the start of the month as the BOC participated in the coordinated rate cuts then. The accompanying statement also maintained a dovish tone and highlighted the weakening CAD as an offset to slower economic growth and deteriorating terms of trade. The CAD slumped to a 3-yr low against the greenback and is expected to remain on the back-foot ahead of today’s release of retail sales for August.

Meanwhile, Bank of England governor Mervyn King was particularly downbeat in a speech last night, highlighting that the recapitalization of the banking system was a result of an “extraordinary, almost unimaginable, sequence of events” which had been triggered by the Lehman’s collapse on Sep 15. He referred to the global credit crunch and the slowing in capital inflows into the UK, saying "...Unless they (capital inflows) are replaced by other forms of external finance, the adjustments in the trade deficit and exchange rate will need to be larger and faster than would otherwise have occurred..." This, combined with a 28-year low in UK manufacturing sentiment was the market’s green light to pound GBP lower, GBPUSD hitting a 5-year low below 1.6500 during the Asian session today.

An article in the wall Street Journal picks up on the theme of hefty FX losses at some corporates as a result of the recent sharp FX swings and USD’s resurgence, hot on the heels of yesterday’s news that HK’s Citic Pacific faces losses of up to USD2 bln from wrong bets on currencies. The article suggests that more such problems in other corporates may come out of the woodwork, with a particular reference to Latin America, where problems have already surfaced.

The Asian session saw the theme of broad USD gains continue, with the EUR slicing through reported barrier defense at 1.3000, sliding quite easily to the low 1.29’s, new lows for 2008. Little seems to be able to stand in the way as the pair targets the1.2600-1.2700 window. EURJPY held the 130.0 mark for a while before succumbing under EUR’s pressure, taking out the 2005 low with 125.85 the next target. GBPUSD was also pressured through 1.6500, hitting new 5-year lows, with no sign of any good news coming out of the UK at the moment.

Chart: USDJPY

Potential triangle formation unfolding, if 99.50 holds has possible retracement target to 101.70-90 region

Published on  Wed, Oct 22 2008, 07:21 GMT