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Custom House Money Market Update February 12, 2007

Posted by liverpoolchamber in Business, Events.

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The Bank of England’s decision to leave rates on hold in February crushed the British pound last week, with GBP/USD plunging more than 225 points to the 1.9500 level as traders had bet heavily that the central bank would make a “surprise” hike for the second month in a row. There was much disagreement on expectations for the decision, as the BOE’s concerns regarding wage growth and broader inflation gave them a decidedly hawkish tone at their January meeting. With no policy action in February, we have no statement or minutes by which to gauge whether the BOE’s board is still torn on policy following the previous 5-4 vote to raise rates. The minutes of last week’s meeting will not be available until the end of the month, but next week’s Quarterly Inflation Report should be able to hold over traders until then, as the release will provide insight into the BOE’s inflation expectations. In other UK news, BRC retail sales rebounded to 5.2 percent – a three year high, and consumer confidence improved to +84 – but just missed expectations of +85 – which never the less signals that a tight labor market has kept consumption resilient and sentiment high. There were also signs that house prices remain strong, as the HBOS measure unexpectedly held at 9.9 percent against estimates of a drop to 9.6 percent.
Should the BOE reflect a new sense of urgency regarding price stability, GBP/USD could resume its ascent towards 2.0000 as 5.50 percent – a benchmark rate 25bps higher than that of the US – may only be a matter of time.


Retail Sales are of course not the only story next week. The calendar is full of Industrial sector data with Empire, Philly Fed and IP all on the docket and all the New York survey to be lower. Finally the Trade/TICS numbers will be out but unless there is a shockingly surprising skew in the TICS the impact is likely to be minimal.


ECB President Jean Claude Trichet used the word “strong vigilance”, so much in last weeks ECB press conference it would appear that he couldn’t really care about the imbalances in the EUR/JPY carry trade. He also dismissed the MNI report from the week prior as having no credibility. In short, ECB President Jean Claude Trichet was especially hawkish in his ECB press conference and that tone helped the EURUSD gain 33 basis points against the dollar last week.
The Euro-Zone calendar remains very thin with only ZEW and EZ GDP on the docket. Both gauges are expected to show improvement which could help the euro a bit, but next week’ trade clearly belongs to US data and the euro is likely to revert to its role as the anti-dollar rather than make any waves of its own. The bigger question in the pair remains centered on rates. ECB has telegraphed that it will go to 3.75% in March but anything beyond that remains uncertain.


Trade at the start of the week will be driven by the reaction – if any- from the G-7 meeting over the weekend. Although no one expects any specific language addressing yen weakness even a covert reference on a need for global rebalancing may be enough to trigger a wave of USDJPY selling. The action could be even more interesting given the fact that Japan is on holiday and liquidity is likely to be thin. Once the G-7 drama has passed, the only other event on the Japanese calendar with market moving potential is the GDP release on Thursday. The data is expected to show a vast improvement over the prior quarter jumping to 3.8% growth versus 0.8% growth in Q3. The news may finally provide some positive fundamental foundation for beleaguered yen bulls, especially if the consumption component of the release shows a strong rebound.


The G7 industrial powers, under pressure to address a decline of the yen, warned investors on Saturday that they could get burned betting in one direction when Japan’s economy was continuing to strengthen.

The Group of Seven also repeated appeals to China to relax the state grip on the yuan’s exchange rate by calling for more currency flexibility and citing the world’s fourth-biggest economy by name. And they commissioned a report on hedge funds. The main innovation at a meeting dominated by currencies and market risk came in a declaration of confidence in the recovery of Japan’s economy and warnings from top officials against the carry trade — an investment play that compounds yen weakness. In a statement issued after talks in Essen, Germany, the G7 said the U.S. economy was solid and Europe rebounding broadly. “Japan’s recovery is on track and is expected to continue. We are confident that the implications of these developments will be recognised by market participants and will be incorporated in their assessments of risks,” it said.


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