20150423 – THE MIGHTY GBP

Good morning

` High Low High Low
EUR/USD 1.0728 1.0679 USD/ZAR 12.2890 12.2020
GBP/USD 1.5041 1.4989 GBP/ZAR 18.45 18.37
EUR/GBP 0.7135 0.7117 USD/RUB 52.63 52.00
USD/JPY 120.10 119.66 USD/NGN 199.3 198.5
GBP/CHF 1.4612 1.4521 S&P 500 2,108 2,101
USD/ILS 3.9619 3.9317 Oil (Brent) 63.09 62.47

Despite the 2 main parties running neck and neck in the polls and the real threat of LABOUR/SNP coalition government, the GBP shrugged off this “bad” news and once again rallied through 1.50, only this time it was on the back of the MPC April minutes. Bottom line the BoE sees more medium term upside risks to inflation and wages which in turn means an interest rate hike is coming. No doubt the weak GBP vs the USD added to the depressed inflation figures as food and oil prices kept inflation at 0%.  The minutes quoted “it was possible that the appreciation of sterling was feeding through more quickly into the CPI than expected. That could mean less downward pressure on prices to come and a faster pickup in inflation when the effects of recent falls in energy and food prices drop out of the annual comparison.” Furthermore the committee added “it was unlikely that activity growth could be maintained at its current pace for long, without generating greater inflation in wages and prices, in the absence of some material improvement in labour productivity.” In other words the committee views there is a medium-term risk that wages and inflation are leaning to the upside giving rise to the prospects of higher interest rates. I stress MEDIUM here as the market is not anticipating a rate rise until late 2015 early 2016. One thing’s for certain, whereas before the data was pointing to the possibility the UK would hike before the US, this has now been dispelled and the hike will in all probability come when those wage and inflation numbers start to grow. I bet the BoE’s biggest fear (and they will not admit this publicly) is if there is a change in government in May, this could potentially derail the BoE’s plans given the potential damage to the economy that a Labour/SNP government will cause. Yes i am that worried!!! The GBP not only rallied vs the USD but also (as you can see from the table) against the EUR (-0.0080 pips) and CHF (+0.0350 pips).

The SNB (Switzerland) reduced the group of sight deposit account holders that are exempt from negative interest rates in an attempt to increase to effectiveness of the banks negative interest rate (-0.75%) policy as a disincentive to hold Swiss deposits. This announcement will add downward pressure on overnight rates and keep the CHF under pressure. While the threat FX interventions and further interest rate cuts may be used by the SNB, we do not expect this to be forthcoming as the SNB allows the market to determine the CHF levels for now. Exporters in CHF have had a pretty tough time since the peg was abolished with the CHF now 16% stronger vs the EUR alone. The SNB are trying to make it as unattractive as possible for the Greeks and (ECB) QE money to end up at the SNB. The Swiss do not want to be seen as a safe haven arena, and will therefore continue to let the market know this.

Greece…who would have thought after the bells and whistles in Maastricht that we would be talking already of an EU member leaving the EU. There I was thinking that in an age of mind-boggling technological, medical and fiscal advancement the intelligent folk in Greece would realise by now that they have no other option but to reform and change their ways. As Warren Buffett noted recently, GREXIT might not be such a bad thing. Mr Buffett, you might have a point. While you are unlikely to hear what is going on behind the scenes I can almost guarantee that the CB’s (ECB, FED, BoE, BoJ) are all talking about the possibility of GREXIT and how they will support the financial system in the event of this happening.

Data: Weak data out of China and Germany this morning. The number on the left is today’s print vs last month’s number (on the right). No wonder the PBoC are WORRIED. They lowered the RRR rate by 100bps recently and with a continued slowdown across the board, lowering their interest rates and continued QE is a given.

Chinese HSBC Manufacturing PMI (Apr) 49.2 49.6


German Manufacturing PMI (Apr) 51.9 52.8



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