[B]
Talking Points
• Yen: Eco Watchers sinks to 38
• Australian Dollar: Takes out 8800 as carry demand returns
• Pound: Big Bounce as Inflation and Housing beat expectations
• Euro: Holds 1.4650 on quiet trade
• US Dollar: Pending Home Sales on Tap[/B]
Sterling was the star of the show in FX at the start of the week as hotter than expected PPI readings and broad corporate demand for the currency spurred an early morning rally taking the pair higher by 100 points. After a woeful beating last week, which saw cable decline by more than 400 points in one-way trade, pound bulls were greeted with much more constructive price action today.
With the news of a BOE rate cut behind it, the market focused on today’s stronger than forecast PPI readings which printed at 4.5% vs. 4.2% consensus view. The rise in energy costs forced UK factories to increasing prices at the fastest annual pace since 1991 while food prices posted their biggest gain since 1993 adding to inflationary pressures. With oil prices receding from their November highs the worst of the energy impact may be over. However, with PPI readings more than double the BoE target rate of 2.0%, MPC members will have to think twice before cutting rates any further in Q1 of 2008.
Cable was also boosted by the strong DCLG House prices readings which increased by 11.3% suggesting that the housing demand in UK, despite the global crunch in credit, remains firmer than most market participants anticipated. Since housing is one of the key components of MPC monetary policy, today’s news only reinforces the view that the BoE may be done easing for now. With FOMC tomorrow expected to lower US rates another 25bp sterling could climb to 2.0500 and beyond as short covering and yield flows provide support for the unit this week.
Meanwhile in Japan, the Eco Watchers sank to it lowest level in 4 years as “man in the street” merchants remained pessimistic about economic prospects. Today’s news almost assures the fact that BOJ will remain stationary on rates into the first several months of next year, irrespective of the rhetoric from Japanese monetary officials. GBPJPY reached 228.00 as a result and could continue higher if equity indices remain supportive.
Finally, as all eyes turn to tomorrow’s FOMC meeting we tend to agree with the consensus view that the Fed will only raise by 25bp rather than the more dramatic 50bp cut. As we noted in our weekly piece, “If the Fed were to cut by 50bp next week, such a move would almost assuredly be taken as a sign of panic and talk of recession would be quickly revived.” The one piece of data that could turn the market dovish is today’s Pending Homes sales data if it printed markedly worse than expected. Barring that surprise a 25bp cut is the most likely outcome for tommorow.
