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GBP in focus today, JPY weakening expected to continue

Thu, Feb 26 2009, 07:41 GMT
by Saxo Bank Strategy Team

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Bank of England MPC members were out in force yesterday and garnered extensive coverage on the wires. Not one could produce anything confidence inspiring and Blanchflower was one of the most...

Bank of England MPC members were out in force yesterday and garnered extensive coverage on the wires. Not one could produce anything confidence inspiring and Blanchflower was one of the most negative. BoE’s Sentance suggested the possibility that further UK rate cuts would not make a massive difference to the current and future situation, but the recent cuts and the weakness of the pound were showing tentative signs of influencing the level of inflation. Sticking to the theme of weak GBP, BoE’s Barker said that exporters should benefit from the pound at current levels and should increasingly bring about the replacement of imports by goods and services produced in the UK. Blanchflower, the well-known dove, was at his most scathing last night, saying the biggest mistake has been to do too little too late. In addition, he highlighted that the UK recession may worsen “significantly” and that currently this was not the bottom of the economic slump. He urged a push to zero interest rates as soon as possible and support this with quantitative easing “quickly”. He also commented that inflation would not return to 2% without more easing and called for a policy rate of 0.5%. On the whole, GBP never stood a chance and tumbled to 1-week lows just as it appeared to be enjoying a period of relative bullishness.

The US revealed details of its stress test plans for banks last night, a program designed to allay growing fears about the health and future of the financial system. The stress test involves a range of possible future scenarios over a two-year period, the potential losses under these scenarios and the capital that would be required to absorb such losses. The WSJ reports that the worst-case scenario involves 2010 unemployment at 10.3%, Case-Shiller house price declines of 22% in 2009 and 7% in 2010 and GDP contractions of 3.3% in 2009 and 0.5% in 2010. The government expects to assess potential losses by end April. Thereafter US's 19 biggest banks will have 6mths to raise private capital before the government will provide a buffer. That buffer will be preference shares convertible into common shares at a 10% discount to Feb 9 price. They will carry a 9% coupon and can be converted at the issuer's request, however they will automatically convert after 7 years.

MAJOR HEADLINES – PREVIOUS SESSION

• US Jan Existing Home Sales at 4.49 mln vs. 4.74 mln prior and 4.79 mln expected

• US Jan existing home Sales at -5.3% m/m vs. revised +4.4% m/m prior

• NZ Jan Trade Balance at –NZD187 mln vs. revised –NZD334 mln prior

• AU Dec Conference Board Index at -0.9% vs. revised -1.1% prior

• AU Q4 Private Capital Expenditure at +6.0% vs. revised +1.6% prior and -3.0% expected

• AU Nov Average Weekly Wages at +5.5% y/y vs. +4.7% prior

THEMES TO WATCH – UPCOMING SESSION

Events Today:

• UK Nationwide House Price Index (0700)

• German Unemployment (0855)

• EU Retail PMI (0900)

• EU Business Climate Indicator (1000)

• EU Consumer/Industrial Confidence (1000)

• US Durable Goods Orders (1330)

• US Initial Jobless Claims (1330)

• US New Home sales (1500)
  

US Dollar/Japanese Yen - JPY weakness expected to continue

There was more bad news for the JPY today as funds flow data showed a hefty outflow from Japan for the second week running.
Japan buying of foreign bonds in the week to Feb 20 amounted to JPY1.231 tln, on top of the JPY1.36 tln seen last week, and is the largest 2-week outflow in the last 8 years.
Anecdotal evidence suggests public pension money has been fueling the buying. This could lead to a further short squeeze on JPY longs. Coming on the back of the horrendous trade numbers yesterday, albeit Lunar New Year affected, the path for the JPY looks particularly treacherous. It is also worth noting that retail Japanese margin traders recently switched to long JPY positions versus USD EUR and GBP and may be the next to face the squeeze.

Australian Dollar/US Dollar - Upside suprise in AUD data

There was a surprise in the Australia data earlier today, where private capital expenditure rose a staggering 6.0% in Q4 compared with expectations of a 3.0% contraction. Better performance was recorded across all sectors and the planned new capital expenditure out to June 2010 showed strong spending plans for the period. AUD was given a boost post-data and will raise the question whether the data will slow the RBA’s recent rate cutting spree at its March meeting.

Note: the support/resistance levels used in the matrix’s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.

Published on  Thu, Feb 26 2009, 10:59 GMT

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