Pound Loses Its Luster - 6% Rates History?

[U][B]Talking Points
[/B][/U]- Japanese Yen: pulled and pushed as Nikkei rallies but Northern Rock news weighs on carry

  • Euro: Sidelined until US Retail Data
  • Pound: Northern Rock rescue weighs
  • Dollar: Retail Sales key to bull case

hat a difference a few days makes in the currency market. Just last week UK economic data was read hot with both consumption and production gauges showing healthy gains. Another rate hike by the BOE appeared to be only a matter of time as global credit markets stabilized Now. however, any expectations of 6% money from UK before year end have essentially evaporated as a series of surprising announcements from the real estate sector raised speculation that UK may be on the cusp of its own credit crisis.
Last night?s shockingly low RICS reading which printed at -1.8 vs. 10.0 forecast was the first piece of news to puncture holes in cable bulls sunny argument, but sterling really fell off the cliff after BOE announced plans to provide liquidity to Northern Rock as UK?s fourth largest mortgage lender was finding it increasingly difficult to access longer term funding. While the BOE press release specifically noted that “FSA judges Northern Rock to be solvent, as it exceeds its regulatory capital requirement and has a good quality loan book,” currency traders took a more jaundiced view of the events, speculating that Northern Rock, like so many so many mortgage lenders may have gotten caught in the classic “borrow short, lend long” squeeze. Even if the current situation in UK lending sector is resolved with minimal loss of capital, the news over the past few days clearly shows the stress fractures in the UK economy and is likely to produce a much more cautious policy path from the BoE. Therefore forecasts of 6% UK rates by the end of 2007 appear to be shaky at best and that fact should weigh on the pound going forward.
Finally the marquee economic event of the week takes place at 12:30 GMT today when US Retail Sales numbers are due to report. For dollar bulls this number is absolutely vital in supporting the “slowdown” rather than the “hard landing” view of the US economy. If it disappoint to the downside the pressure on the Fed to cut rates by as much as 50bp will be immense.