Good news for GBP: Mark Carney looks set to stay at BOE

The US election saga has been garnering all of the headlines this weekend until one popped up from the FT, which is reporting that Mark Carney is willing to serve an 8-year term at the BOE. This is big news for UK assets, the pound had a mini pop higher during the Asian session, but there could be more to come. If this story is true, then it is a beacon of stability during a period of uncertainty for the UK economy, which should benefit the currency and stocks alike.

Will the “unreliable boyfriend” finally commit to the Old Lady?

We will hear from the man himself on Thursday, when he gives his post Inflation Report press conference. The question of will he stay or will he go is likely to be the major topic of discussion, at least from journalists, and if he confirms that he is staying this could trigger a pick up in UK bond yields, as fears about the BOE stewardship during Brexit eases, potentially triggering a rally in GBP/USD back towards 1.25.

Interestingly, another article on Saturday said that Carney may announce this week that he was leaving the BOE next year, this is a reminder that we need confirmation from the BOE that he is staying before we get too giddy with excitement that the “unreliable boyfriend” has finally committed to the Old Lady.

Clinton’s election campaign hits the skids, what now for risk?

Hillary Clinton had been cruising to victory in the US Presidential election last week, however 7 days is a long time in politics and news that the FBI has reopened its investigation into her habit of sending emails from a private server has left the markets nervous and jittery at the start of a new trading week.

Email-gate leaves investors’ reassessing election risk

The impact of email-gate has seen broad-based dollar weakness, with Treasuries rising and yields falling, and even beleaguered gold is starting to look perky again as it tests a key resistance level at $1,275 – its 200-day sma. The lightening rod for Donald Trump’s electoral prospects, the Mexican peso, has taken a hit, it fell more than 2% vs. the USD after news of the Clinton FBI investigation broke late on Friday. Whether or not the peso will recover on Monday could depend on how the markets interpret the latest election polls.

Clinton still likely to win, for now

An ABC/ Washington Post head-to-head poll on Sunday saw Clinton’s lead narrow to 49% with Trump at 46%. Although this looks dangerous for the Clinton camp, they can take some hope from the electoral college vote tracker, which still gives Clinton a fairly impressive lead. She has 263 votes, just 7 shy of the 270 needed to win the election, versus 126 votes for Trump. This FBI investigation would need to escalate quickly to erode this lead, so even if risky assets take a knock on Monday we think that it will be short-term, as Clinton still looks set to win next week, although maybe not by as large a margin as she may have envisioned a week ago.

With the US election still throwing us curveballs at this late stage in the campaign is there anything else to keep the markets interested? You bet. There are four key central bank meetings this week including the BOJ, RBA, Fed and BOE. We think the RBA and BOE have the biggest potential to disrupt markets. Australia’s RBA is not expected to change policy, but if its statement sounds less dovish as a result of the recent uptick in inflation then we could see a surge in the AUD.

UK growth risks could be to the upside

If Mark Carney confirms that he is staying on at the BOE this week that is likely to overshadow the BOE rate announcement and latest Inflation Report on Thursday. However, the Inflation Report is still worth watching, in case the Bank changes its GDP forecasts for 2017 (it is currently expecting just 0.8% growth for the UK next year). While there is still a lot of downside risks for the future of the UK economy, the outlook for 2016 has improved after better than expected GDP for Q3. If the Bank revises up its forecast for growth next year and sounds more optimistic about the post-Brexit economy then we could see a sharp recovery in GBPUSD, potentially back towards $1.25.

Could the euro be in for a less bumpy ride?

Interestingly, there has been a reduction in net shorts for GBP, according to the latest CFTC data; the number of short contracts in GBPUSD has fallen to -83.9k, down from a peak of -97.5k earlier in October. In contrast, net short positions in the euro increased last week to -124k, even though the euro was one of the best performers vs. the USD. EURUSD staged an impressive recovery, and at the time of writing is less than 10 pips away from the key $1.10 level. This could be an interesting week for the single currency, as it may benefit from two factors: firstly, the bounce back in German bund yields, which rose to their highest level since May last week, and secondly, if there is a squaring up of positions, with investors choosing to sit on their cash until the US Presidential risk is out of the way, then euro short positions could be reversed. If this happens then it may push EURUSD back above 1.10, and potentially towards 1.12 in the coming days.

Wrap-up

With stocks already looking vulnerable, and US election risks potentially mounting with just over a week to go before polling day, we may see volatility rise and risk assets come under pressure in the coming days. The USD, Mexican peso, S&P and Dow Jones may see the largest declines, with the JPY, CHF, euro and gold benefitting from safe haven and rebalancing inflows.