GBP again under pressure after more bearish weekend press


MAJOR HEADLINES – PREVIOUS SESSION

  • CA Sep. Unemployment Rate out at 8.4% vs. 8.8% expected and 8.7% prior

  • CA Sep. Net Change in Employment out at +30.6K vs. +5k expected and +27.1k prior

  • CA Aug. Int’l Merchandise Trade out at -2.0b vs. -0.9b expected and revised -1.3b prior

  • US Aug Trade Balance out at -$30.7b vs. -$33.0b expected and revised -$31.9b prior

  • CA Q3 Business Outlook out at 53.0 vs. 34.0 expected and revised 39.0 prior

  • NZ Sep. QV House Prices out at -1.1% y/y vs. -2.8% prior

  • SI Q3 Advance GDP Estimate out at +14.9% q/q vs. +14.5% expected and revised -12.7% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • GE Wholesale Price Index (0600)

  • US NEC’s Summers to speak (1615)

  • US Treasury Asst. Krueger to speak (1715)

Market Comments:

Fed Chairman Bernanke’s hawkish comments early Friday set the tone for the dollar on Friday and the data releases confirmed the trend. The US trade deficit for August narrowed to $30.7b from a revised -$31.9b the previous month though the bulk of the improvement came from a sharper reduction in imports than exports.
Exports showed a 0.2% increase while imports shrank 0.6% in the month. In addition, the real, ex-petroleum deficit increased to the widest deficit since January suggesting that underlying trends may be somewhat less-favourable for the dollar in the longer-term than August’s headline data implies.

The Canadian trade data on the other hand was marginally worse than expected, showing a wider deficit of –C$2.0b versus –C$0.9b expected, but this was completely overshadowed by a very strong employment report.
In September, Canada added some 30.6k jobs, the second consecutive monthly gain, with most of the additions coming in the goods-producing sector. A total of 46.2k jobs were added in this sector, offsetting a 15.6k reduction in the service sector. As a result, the unemployment rate dipped to a four month low of 8.4%. Adding fuel to the recovery fire, the BOC’s business outlook survey posted a massive rebound in Q3, with all indicators of business activity increasing since the July report and pushing the indicator to a record 53.0 from 39.0. These positive inputs helped the CAD higher on the day and to its highest level against the greenback in one year.

Adding to the hawkish inputs from late last week, Fed’s Bullard was speaking again over the weekend and commented that he thought the US economy’s output gap is being over-emphasized and as such the medium-term inflation risks may be higher than many traditionally believe. Note the Fed’s recent increased focus on inflation, and the jump in US bond yields on Friday, may increase awareness of Thursday’s release of CPI data for September. Bullard also described expectations of economic growth of 2.5% to 3.0% for the second half of the year as “reasonable” but warned that, while unemployment appeared to be leveling off, it was likely to hit double digits having risen to a 26 year high of 9.8% in September.

As the USD rallied on Friday, so GBP was a notable target for selling and this was compounded into the Asian morning session this morning following weekend press. In the UK Times, an article on today’s release of its report on UK Prospects by the Centre for Economics and Business Research (CEBR) says the CEBR predicts that the current low 0.5% bank rate would stay until at least 2011 and would not reach 2% until 2014. In addition, it suggests that GBP could fall as low as 1.40 against the USD and parity against the EUR amid this extended low interest rate environment. This, combined with the BOE’s stance to wait until next month to review its QE measures, has but GBP on the back foot again.

The was also talk that British PM Gordon Brown would announce later today that the UK Government was considering selling off some non-financial assets to shore up the country’s ailing finances. Among the assets mentioned are the Channel Tunnel Rail Link, betting company The Tote and the government’s 33% stake in European uranium consortium Urenco. Selling the family jewels?

In a quiet Asian session due to the Japan holiday, the highlight was Singapore’s advance Q3 data release and monetary policy review. Growth beat forecasts, though showing a slightly slower pace of growth from Q2, with quarter-on-quarter growth of 14.9% (14.5% expected and +20.7% in the previous quarter). Despite the second quarter of positive growth, the MAS announced that it was keeping its accommodative policy stance unchanged. There were also no changes to the width or centre of the current policy band and kept its zero-appreciation of the SGD NEER policy in place. The city sate’s central bank highlighted that, although the Q# data showed improvement there were no signs of the growth being sustained and export demand has yet to recover fully.
USDSGD showed a strong rebound from early morning lows amid local chatter of some official support, though the firmer USD also helped.

Apart from this, it was a quiet session in Asia with Tokyo’s absence, and that of the US and Canada later, a major barrier to participants getting too involved. Expect we will see a similar scenario unfold in Europe after the initial handover flurry, especially when the only data releases slated for today are German wholesale prices.